How to Identify Bad Financial Advice

Asking someone how to handle money is like asking them which religion is the correct one. Everyone has an opinion, and everyone thinks they’re right. Between all of these differing views, it can often be very difficult to discern who’s advice about money is trustworthy and who’s should be discarded. Fortunately there are several questions that you can ask yourself to figure out whether the piece of financial advice you are given is worth following.

Does this person have anything to gain by me following their advice? Quite often financial advisors have a vested interest in you investing in a particular investment product as opposed to another. This is a clear conflict of interest. If someone has something to gain by you following their advice, their advice can never be seen as objective, no matter how much they believe in what they are telling you. Only make use of financial counselors which have nothing to gain by you signing up for a particular product or making a specific investment.

Is the person qualified to give me financial advice? You wouldn’t ask your auto-mechanic to try to fix your heart problem, so why would you accept financial advice from someone who is unqualified to give financial advice. Does the person trying to give you advice actually have something to show for themselves? Do they have any sort of wealth that they made for themselves? Accept financial advice from people who know how to generate wealth and those who know extensively about money. You wouldn’t accept dieting advice from obese people, so don’t accept financial advice from poor people.

Do I understand the advice? The most common reason people get ripped-off is when they buy a financial product just because someone tells them to and they trust the person’s authority on money. Only buy a financial product, such as insurance, investments, and the like when you understand it and can explain it to an 8th grader. If the financial advice doesn’t make sense at all to you, chances are it doesn’t make sense, period.

Do I feel good about following this advice? Sometimes we’re given advice that we can’t quite figure out what’s wrong with it, but it seems a bit fishy. If you have a really bad feeling about a piece of advice you are given, you should trust your gut. Chances are if you feel that there is something wrong with it, there is. If you feel very uncomfortable about following someone’s financial advice, there’s a reason for it.

What do other people have to say about this advice? If the person that is offering you financial advice is the only person in the world that believes in that, watch out. There are time tested financial principles that do work. If the person offering you financial advice disagrees with the rest of the entire financial community, you should probably find someone to listen to about money.

Has the advice worked for others? If someone is trying to sell you some brand new financial product, watch out. If the advice does not have a track record of success, there’s probably a reason for it. Don’t be a guinea pig for someone else’s new brand new untested financial ideas. Follow age-old time tested financial advice. If you are going to invest in something or follow a financial plan, make sure it has a track-record of success.

A lot of very poor financial advice is presented in best selling books and on television that no one should follow. The best selling financial author, Robert Kiyosaki, tell us not to diversify our investments, and Jim Cramer of “Mad Money” offers stock picks without doing any in depth research on the companies. Be very intentional about who’s financial advice that you accept. Ask those questions of yourself so that you do not end up following bad financial advice.