How to Avoid Bad Financial Advice

It’s hard to know the best steps when it comes to your finances, especially in the digital age, where good and bad advice is everywhere.

Good Financial Advice vs. Bad Financial Advice

No matter the source of your financial advice, it’s important to consider how that advice affects your feelings, according to Maikel James, founder and CEO of Boujie Budgets, a financial education platform targeting young professionals.

James said to The Balance, “Many experts rely on messages that make consumers feel bad or stupid, and if the advice feels like that, it’s likely not good. If the advisor doesn’t encourage you to speak to a professional about your personal financial situation and use their advice as a general guideline, it’s probably bad advice.”

Good advice:

• Actionable steps to achieve goals
• Legal and adheres to rules
• Cares about your personal interest

Bad advice:

• Skipping steps or exploiting loopholes
• Doubtful and questionable practices
• Exploiting your ignorance for financial gain

Cindy Hall, a certified financial advisor and financial planning assistant at Natalie Taylor Consulting Services, describes how to distinguish good advice from bad advice in the same way you determine whether money is real or counterfeit.

Hall said in an email to The Balance, “You study the real thing even if you know what it looks like, how it feels, and even what it smells like. The same applies to good financial advice. The more time you spend recognizing what good advice looks like from reliable sources, the easier it will be to identify bad advice when you see it on social media or elsewhere.”

Good financial advice contains actionable steps, even if they seem challenging at the moment. For example, if you need help paying off student loans and don’t know how the process works, good financial advice would first be finding out your loan balance, researching your repayment plan options, and then moving forward to develop an action plan, including decisions about whether you consolidate your loans or make automatic payments.

Note: If you’re skeptical about a piece of advice you’re hearing, trust your instincts and verify the information. Validate those claims with a quick online search using reliable sources such as nonprofit organizations or government entities.

Hall said, “If you find something intriguing, go to the source. It’s very important to know who is behind the advice. If the advice is good, it’s likely to be well-documented in recognized publications in the financial business industry, blogs, and podcasts.”

Signs You’re Getting Bad Financial Advice

Bad financial advice doesn’t always appear bad. To identify it before you fall into its trap, pay attention to these red flags:

You can’t find any facts:

Just because someone is making a bold financial claim doesn’t mean you should immediately follow it. For instance, there are many TikTok videos that start with phrases like “This stock will make you rich” or make other investment promises. Instead of jumping in and investing in a specific stock, do the necessary research.

According to Maikel James, you should “always verify the facts or ask a trusted professional.” Better advice is often based on research and facts.

If there’s no way to verify whether a financial claim is true, you might want to step back and avoid it. Besides finding reliable sources online, consider reaching out to a licensed financial professional to clarify the claim.

Not

Credentials:

When listening to financial advice, such as TikTok, about the best stock to invest in right now, it’s important to ask one question: Do you know who is providing you with this information?

The UK’s Financial Conduct Authority recently conducted research into the investment habits of younger individuals and noted that they are engaging in higher-risk investments than previous generations. As a result of the research, they issued a warning, stating that relying on “contemporary media” for advice and news may have detrimental effects. The warning stated: “Younger investors may have lower levels of financial resilience, making them more vulnerable to losses in investments.”

James said, “Real financial professionals lead with their credentials. They will disclose whether they are registered financial advisors or consultants or educators. If their social accounts show no signs, they are likely not worth listening to. Be very cautious of those who promise guaranteed returns or give investment advice without credentials.”

Note: If you believe you have encountered a scam, you can report them to the regulatory office in your state.

There are conditions:

According to an annual report from Influencer Marketing Hub, the social media marketing industry has grown significantly in recent years and is expected to reach about $13.8 billion in 2021. In 2016 – just five years ago – the industry was valued at $1.7 billion.

As more companies rely on bringing influencers into their strategy, the likelihood increases that these individuals receive money from businesses to share specific information, and this also applies to online financial experts. If you can, find out if the person you follow for financial advice receives money from companies to share financial tips and what that partnership entails. This varies from influencer to influencer, as there is no specific standard for everyone. If your educator has no general guidelines you can find, you have no idea whether they are operating in your best interest (or against it).

Be very cautious of experts who cannot tell you how they earn their money, whether through partnerships or investments. And steer clear of anyone who promises you will become rich if you pay them first.

When it comes to your personal investments, look for an independent financial advisor or a certified financial planner (CFP), as these individuals are legally required to prioritize their clients’ interests. Be aware that many financial professionals (including advisors and money planners) earn commissions on the products you purchase through them.

Note: Financial advisors who rely solely on fees charge by the hour for their advice, so they may be less biased. However, there are certain products that you typically cannot obtain through them, such as life insurance, which you will likely need to purchase from someone who receives a commission.

Conclusion

Social media and the internet can be great places to find reliable financial advice, especially regarding your personal situation and if you know how to recognize it. But that doesn’t mean everyone has your best interest at heart, or that everyone who wants to help has the background and expertise to do so.

James said, “If you take investment advice from someone who is not a licensed professional, they are not responsible for your loss; they face no consequences if you lose your money. Always remember that everything online is a suggestion, and your personal financial situation will be a key factor in how you save, invest, budget, and pay taxes.”

Instead

Whoever bears the damage, investigate. Ensure that the sites you read are legitimate, ethical, and research-based. If you can afford it, speak to a financial advisor who has the necessary background to provide personal and strategic advice. But regardless of everything, and no matter who you deal with, make sure you are comfortable, informed, and do not feel undue pressure to make an expensive decision.

Source: https://www.thebalancemoney.com/how-to-avoid-bad-money-advice-5118482