These days it seems everyone is offering financial advice, whether it's a self-proclaimed expert on Twitter or a well-meaning but misinformed friend. While a good nugget can help you keep more money in your pocket, bad advice can leave you digging out of a financial hole.
Here are some signs that a piece of financial advice should be considered with caution, if not ignored.
1. The advice is confusing. Always have a clear understanding of what you're doing before making a financial move, says Thomas Nitzsche, a spokesman for ClearPoint Credit Counseling Solutions in Atlanta. Too many people come to ClearPoint for help after following advice that confused them, he says. For example, some had worked with debt settlement companies not realizing that their bills would stop being paid and their credit would take a hit. Some companies "benefit from the fact that people don't understand how they work," Nitzsche says. If a plan doesn't make total sense, look for a different solution.
2. The adviser has a vested interest. Always question the motive of the person giving the advice. If it's a person peddling a book or service that can "help" you, be cautious because the person could just be trying to make a sale. Even close friends or family members could have a vested interest if they get a discount or kickback for referrals.
Some financial planners make commissions on the financial products they sell, so if you want objective financial advice about investments, find a fee-only planner who has no stake in what investments you make, says Lauren G. Lindsay, director of financial planning for Personal Financial Advisors. A fee-only planner charges a flat rate and has no financial incentive to steer you toward one investment product over another. The National Association of Personal Financial Advisors, a national association of fee-only financial planners, can help you find one.
3. The advice comes unsolicited. Scammers make a living giving bad financial advice, and they typically don't wait for you to find them. They come to you. If someone contacts you via phone, email or even text promising a solution to a financial problem or asking you to take action concerning your finances, run the other direction. One of the biggest financial scams of the year involves fraudsters who pose as Internal Revenue Service agents and call Americans to demand repayment of "back taxes." Failure to pay means jail time, the scammers threaten.
If someone contacts you about doing anything financially, research the person or organization extensively by checking the Better Business Bureau and searching for complaints online. If it's an organization you know and trust, hang up with the person who contacted you, look up the phone number and call the organization directly to make sure the person you spoke with is indeed who they claim to be.
4. The advice is one-size-fits-all. Good financial advice should take into account differences in people's lifestyles and preferences, says Joel Doelger, director of community relations and housing counseling for Credit Counseling of Arkansas. For example, one piece of oft-repeated advice dictates that housing expenses should never be more than 30 percent of your take-home pay, Doelger says. "That might be true if the person has other major family financial obligations, but breaking that rule could be quite appropriate if the homeowner doesn't have family, likes to spend time at home, doesn't like to travel and has already established a retirement fund." If the person giving you financial advice doesn't know about or care about your unique financial details, the solution won't be tailored to your unique needs.
5. The advice is framed as your ONLY option. If someone tells you, "This is what you MUST do," do this instead: "Put on the brakes and seek options from an agency or entity that will lay out alternative choices," says Linda Humburg, manager and certified financial professionals for FamilyMeans Consumer Credit Counseling Service in Stillwater, Minnesota. When it comes to your money, rarely will you have one choice.
6. The advice promises quick and easy results. Unless you win the lottery or get an unexpected inheritance, chances are the road to wealth will be slow and require sacrifice. If someone promises you a solution that sounds too good to be true, most likely it is just that. "A surefire sign of bad advice is that it's a fast and easy fix to a problem that's been festering for a long time," says Doelger.
Steps to take extra care
Even if a bit of financial advice sounds good, there a few extra precautions you can take to protect your money and your interests.
Search online. It's easy to check an organization out by searching online to see what others have said about them. Also check the Better Business Bureau and the Consumer Financial Protection Bureau for complaints.
Evaluate the adviser. If you're getting financial advice from a professional, make sure that person has a track record. Ask if they're licensed or accredited by a third-party organization that can vouch for their authenticity. If the advice is from a friend, make sure that person followed that same advice and can prove to you their situation improved as a result.
Ask questions. A clear indication that someone's advice isn't worth taking is if they "can't or don't answer your follow-up questions or they won't tell you that they don't know," says Becky House, education and communication director for Seattle-based American Financial Solutions. Someone worth listening to will have more than surface knowledge, and if they don't know something they will be able to refer you to someone who does.