5 red flags to look for when choosing your next personal finance product

Financial decisions should be made carefully and with companies that you trust not to mishandle your money.

Here are some of the red flags that suggest a business may not be the right place for your custom or your cash:

Hidden fees

It’s frustrating when it’s an airline, but it’s somehow even more frustrating when it’s a financial product. If a business conceals or downplays additional charges and fees by burying them in the small print then that is a massive red flag.

They may be a perfectly legitimate company but hiding fees and charges means they don’t have confidence in their actual product and they think that the fees might put you off.

And even if you still think the product is fine and the fees are fine, a lack of upfront transparency should be a red flag when you deal with any company.

Bullying sales tactics

No one should ever feel rushed into a financial decision but very often people can feel that way. If a salesperson is thinking more about their targets than their customers’ wellbeing then the customer may feel pushed towards a decision before they have considered it.

If a regulated firm mis-sells a product or offers faulty advice then the customer could make a claim against them, or potentially receive a payment from the Financial Services Compensation Scheme if the company has since gone bust.

However, it’s best to avoid the worry about whether you’re being sold the wrong thing. If a company is pressuring you into making a decision then that is a serious red flag. It’s a good idea to pause the conversation.

That way you can consider whether this is the right product for you and if you even want to do business with them.

A firm taking on debt without adding value

Businesses of all sizes often use debt. That’s not alarming and it isn’t necessarily a red flag. It can even be a sign of imminent major growth and potential, although careful research is needed before you invest.

However, if a company is taking on debt but not adding any additional value to their organisation, such as opening new offices or spearheading new products, then that should be a serious red flag for investors.

After all, if it’s not using the debt to increase its value through growth then you need to question what is going on at the board level and where that money is going.

Debt positivity

In the UK debt fraud is a growing problem, with professional websites and smooth-talking sales pitches luring people in with the promise of low interest, no-credit check loans.

Such unregulated, fraudulent websites simply want to entice victims into sharing their phone numbers. Sign up and you then receive a phone call promising cheap credit on incredible terms but with one condition – you have to pay your first month’s interest in advance.

Of course it’s a scam and if you hand over cash then you have no protection or guarantee, the money will almost certainly be lost unless the police can help you get it back.

Those websites have lots of red flags, including the promise of a loan without a credit check or a bad credit loan at low, low rates. But the biggest red flag is that they are very often very positive about debt, advertising it as a way to solve all your problems.

Regulated, genuine lenders should never imply that debt is a great, easy, consequence-free option. Red flag. Check out the FCA’s Scamsmart website for more information on how you can protect yourself against scams.

Guaranteed returns

All investments carry an element of risk. If a company says it can deliver guaranteed returns then that should be a big red flag. At the very least you need to ask some questions.

Some companies will offer genuinely guaranteed returns for a fixed period as an enticement, but you need to seriously consider whether the returns will realistically be as impressive after that intro.

Others will offer impressive returns that are incredibly unlikely to come to fruition, luring you in with unrealistic promises.

It’s important to properly examine every investment opportunity and not get carried away with promises that may not be as rock solid as they sound.

You’re urged to borrow in order to buy

If a company is encouraging you to borrow money in order to buy into an opportunity – that’s alarming. After all, not only are they encouraging you to get into risky debt, but if that’s their selling tactic then you should probably question whether the opportunity itself is worth having.

Most investment processes involve an element of risk. Values can rise and fall and most people understand there’s the possibility of losing their money. But if you are encouraged to borrow money in order to make an investment that’s almost a double risk. You risk being left in debt with nothing to show for it.

An IFA who doesn’t talk to both of a couple

It’s frustrating when a tradesperson or salesperson doesn’t talk to both partners in a couple, but it’s a serious red flag if an independent financial adviser (IFA) does the same.

When helping a couple plan their finances, an IFA has to fully understand the ambitions and goals of both and has to consider the long-term financial wellbeing of both parties.

If they only talk to the main wage earner or they dismiss one person’s concerns then they are not capable of assessing your financial needs as a couple.

It doesn’t have FSCS protection

The Financial Services Compensation Scheme (FSCS) exists to protect people who take out certain financial products.

It’s best known for its savings guarantee: up to £85,000 of savings is protected per person, per bank.

However, it also protects investors and other financial services customers. Whether it’s pensions, investments or insurance products, if a now-defunct company has mis-sold to a customer or behaved improperly, or if an insurer goes out of business and leaves their customer out of pocket, people can make an online claim direct with FSCS. It’s free, with email, phone and live chat support.

But that’s only the case for firms that were authorised by a UK regulator. That means a company has to be regulated by the Financial Conduct Authority or Prudential Regulation Authority in order for FSCS to apply.

You can check if the company you’re considering investing with is regulated in the UK via this handy FCA register. If it isn’t then you don’t have all the protection you could, and that should be a big red flag.

For more information on FSCS and the different financial products they help protect, you can visit their website at www.fscs.org.uk.