Tool · checklist

The advisor red-flag checklist

1. Fees are disclosed clearly and upfront

   The fee is the only number in the entire conversation that is knowable with certainty in advance, and it compounds against the investor every year whether the strategy works or not. A good answer is one all-in percentage, in writing, volunteered without prompting. A bad answer fragments cost across management, performance, platform, entry, exit, and spread so that no single number looks alarming.

2. Drawdowns are shown, not just gains

   The deepest historical fall — and how long recovery took — matters more than the average return, because losses compound asymmetrically: a 50 percent fall requires a 100 percent rise just to break even. A good answer puts a maximum-drawdown figure next to every return figure. A bad answer is a chart that starts at the strategy's luckiest date.

3. The track record is live, not backtested

   Backtested means built after the fact, with the answers already known — it almost always looks better than live results, because it is the survivor of a private tournament of discarded variants. A good answer names the basis unprompted: live, audited capital, over stated dates, through at least one genuine downturn. A bad answer states returns with live-result confidence and leaves the word backtested in the footnotes.

4. The advisor acknowledges what they cannot predict

   Markets price what is known and move on surprise, so anyone claiming to reliably predict rates, crashes, or currencies is selling a certainty that does not exist. A good answer sounds like "here is what would prove this wrong." A bad answer is a forecast with no failure condition attached.

5. Downside is explained before upside

   The order of a presentation reveals whose interest steers it: the worst case is the decision-relevant number, so an advisor working for the client leads with what can be lost. Upside-first choreography is a sales pattern, not an analysis pattern. Where the drawdown appears in the deck is itself a disclosure.

6. The recommendation matches stated risk tolerance and horizon

   Advice that arrives before questions about horizon, obligations, and loss tolerance is distribution wearing the costume of advice. A good answer asks first and changes the recommendation when the answers change. A bad answer is the same product for every client, decided before the meeting began.

7. Lock-ups and exit penalties are disclosed

   Extra return is often payment for surrendered access — the restriction and the yield can be the same fact. A good answer states exact withdrawal terms, notice periods, penalties, and the conditions under which withdrawals can be frozen, before any commitment. A bad answer reframes a lock-up as "helping your discipline" or "aligning horizons."

8. The strategy is explainable in plain English, not deliberately obscured

   Honest explanations simplify under questioning; sales explanations grow more complex. If the strategy cannot be restated in one sentence — how it makes money, how it loses money, and who must stay solvent for it to pay — the correct allocation is zero, regardless of how reassuring the brochure feels.

Most harm done to investors is not fraud; it is structure. An advisor paid by commission or on assets gathered is rewarded for the sale, not the outcome — principal–agent theory’s oldest case — so pitches drift toward gloss without any villainy required. Pitches that lead with drawdown convert worse and get made less; the ones that reach a reader survived a filter that rewards foregrounding the best number and backgrounding its cost.

This checklist restores the symmetry. The pitch spent its energy on the upside; the reader spends equal energy on the downside, the cost, and the silence.

That is not cynicism — it is completing a deliberately half-finished document.

How to use it in a live meeting

Ask the eight questions in order and score one point per clear pass. A dodge, a deflection, or a “we’ll get to that” counts as a fail — the evasion is the answer. The single most clarifying question sits underneath all eight and is worth asking directly: how, exactly, are you paid if this advice is followed — and how are you paid if nothing is done?

Two tells are worth watching alongside the questions. Over-eagerness — urgency, volume, “limited capacity” — signals need, and need reads as a weak hand. And the provenance gap: a strong recommendation whose origin cannot be shown — no lineage, no working, no “here is why this reached you” — is a claim to expertise with the working removed; a recommendation that cannot show its lineage was not produced by expertise.

Scoring:

• Seven or eight passes earns a deeper look, nothing more.
• Five or six means proceed only once every dodge is answered in writing.
• Four or below means walk away — and note that the failure attaches to the advisor, not just to this product.

A worked example

A hypothetical advisor pitches an “enhanced-income note” paying 9 percent a year.

• Fees are “built into the structure” (fail).
• The brochure shows barrier levels, not historical falls (fail).
• The track record is simulated (fail).
• Asked about limits, the answer is “the issuer has never missed a payment” — a boast, not a limit (fail).
• Downside appears on the final slide (fail).
• Questions about the client’s horizon come after the recommendation (fail).
• Exit is possible “at prevailing prices,” undefined (fail).
• And “autocallable with contingent protection” resists one-sentence restatement (fail).

Score: zero of eight — no further analysis of the product is needed.

The base rate says this outcome is common, not unlucky. Over horizons of ten years or more, the large majority of professionally managed funds — typically 80 to 90 percent in the long-running SPIVA scorecards — fail to beat their simple benchmark after fees, and Sharpe’s arithmetic explains why: the average actively managed dollar must underperform the average passive dollar by exactly the difference in cost. The prior is against any outperformance claim before a single question is asked; the checklist simply prices that prior into the meeting.

Where this breaks

The checklist tests the honesty of the seller, not the soundness of the ground. A perfectly transparent advisor can hand over a fully disclosed product that sits on top of a currency being debased, a pending regulatory reclassification, a custodian who does not actually hold the assets, or an unstable jurisdiction — and an eight-of-eight score will not flinch, because none of those risks live inside the pitch. Separately, a manufactured-smooth fraud can pass seven of the eight questions; a return line with no scars is itself the anomaly, since real strategies earning real returns cannot avoid real drawdowns.

Use the checklist to generate written demands, not final verdicts. It is the first and cheapest line of defence: eight questions cost nothing and stop most bad advice at the door. What passes the door goes on to the four-step claim audit for any specific number, and to the ten questions before any capital actually moves.