An Investor's Litmus Test for Bogus Advice

Navigating financial advice can be challenging for any investor, no matter how experienced or means of investing. With so many financial "gurus" and more access to information than ever, it’s all-too-easy to fall into the trap of misinformation.

In many cases, bad financial advice doesn’t come to you maliciously—it comes by way of good intentions. Whether it’s a well-meaning friend or family member or a professional who just doesn’t have the full picture, bad financial advice can sneak in and have devastating consequences for your financial future.

As investors, it’s up to us to do our due diligence in the area of personal finance. That’s why we’ve put together this litmus test for financial advice. With this system of self-checks, you can put any piece of advice to the test to see whether or not it’s worth your time.

Reminder: This test isn't to weight whether the advice you receive is good or bad, but whether or not it is useful.

Is This Advice Generic?

One of the first signs that the financial advice you’re receiving may not be of the highest caliber is if it is too generic. While money management comes with it time-tested principles that are trusted across the board, truly helpful and applicable advice must be tailored to your needs, circumstances, and era. Generic principles can be helpful—this isn’t to say throw them out.—but judge them with scrutiny because they may not totally apply to you in your situation.

Generic advice is a space filler. People give it to you when they don’t know what else to do. They don’t want to truly invest in your financial situation, don’t want to involve themselves in the complexities you’re dealing with, and don’t want to really deal with you where you are. Generic advice might be true, but it may not be helpful.

Weigh such wisdom against whether or not it actually applies to you where you are right now. If it doesn’t give you the tools for an actionable plan and a clear direction, it may not be all that helpful.

Is This Based on Personal Bias?

One of the reasons we go to the professionals—apart from their credentials—is their ostensible lack of bias. While you may have friends or family members who may be financially savvy, their advice will always come from a place of bias. They have a vested interest in your success and in the manner in which you succeed. For instance, guiding you towards investing in their endeavors or following a similar path may be mutually beneficial—but perhaps not personally beneficial.

Besides this, friends and family will always struggle with objectivity. They will always have an idea about who you should be and what their idea of success for you looks like, whether they realize it or not. A personal investment in you will color the advice that they render.

Because of this, it’s important to seek out financial advice from objective parties, like professional financial advisers or fellow real estate investors in something like a Mastermind. They don’t have a stake in you personally apart from your aligned interests.

Are There Assumptions Being Made?

One of the characteristics you will notice about most financial advice that you find online is that it makes assumptions. It has to.

It assumes that you have money and that certain steps are already within your reach. But, in many cases, financial advice is designed for the rich, even if all lower and middle-class families also deserve access to money management techniques and financial planning skills.

Beneficial financial counsel doesn’t make assumptions about your circumstances or your goals—it actually invests in you.

This is something that takes time not only in terms of intake but in terms of a long-term relationship. Financial wisdom must be tailored to your finances and your goals to be beneficial. Sometimes you have to buck traditional wisdom in order to invest in your future and make the decisions that make sense for you.

Is It Ignoring Complexity or Intersectionality?

There are times when our money management principles are too cut-and-dry. They ignore complexities. For example, one of the pieces of advice we ourselves have given in the past when discussing ways to save money is to cut down on unnecessary expenses. This includes things like subscriptions services: think Netflix, food prep subscriptions, cable, and more.

If you want to save more money, this is a sound principle. However, for someone with low income, or for any of us, holding on to a small luxury like Netflix, which is low cost in the grand scheme of things, may prevent splurging on other luxuries over time. Get Rich Slowly has discussed this concept of holding on to a single financial vice in order to curb impulsive spending.

In short, we are complex individuals and managing our finances is not always as straightforward as we present it. There are complex emotional and psychological factors behind how we relate to our finances. Not only that, but in society at large, things like race, gender, and class, can all impact our finances. They just don’t exist in a bubble.

Be mindful about taking advice without taking into account these complexities.

Does the Advice Come From a Place of Experience and Credibility?

One simple question to ask of any advice received is whether or not it has credibility. While you would hope that your adviser is a credible source, we must always do our due diligence and look to our advisers with scrutiny.

You don’t necessarily want advice from a hyper-rich, hyper-successful individual. You can glean wisdom from them, certainly, but understand that the wealthy make financial missteps all the time. The difference is that they can absorb the risk and take a blow much more readily than most.

What matters is not the size of your guru’s bank account, but the experience and record they have in leading others in achieving their financial goals—whatever they may be. When you talk to your adviser, do you feel heard? Are they tailoring their advice for your needs and your circumstances? How easy is it to vet and verify their track record?

When you speak with a professional, you should not be focused on their personal story of success, but rather, how well they can connect the dots between where you are and where you want to be. It's about crafting actionable, risk-managed strategies for your future.