Many investors still rely on their investment advisors to provide guidance and to help them manage their portfolios. The advice they receive is as varied as the background, knowledge and experience of their advisors. Some of it is good, some of it is bad, and some is just plain ugly.

Investment decisions are made in a world of uncertainty, and making investment mistakes is expected. No one has a crystal ball, and investors should not expect their financial advisors to be right all of the time. That said, making an investment mistake based on sound judgment and wise counsel is one thing; making a mistake based on poor advice is another matter. Bad investment advice is usually due to one of two reasons. The first is that an advisor will place his or her self-interest before that of the client. The second reason for bad advice is an advisor’s lack of knowledge and failure to perform due diligence. Each type of bad advice has its own consequences for the client in the short term, but in the long term they will all result in poor performance or loss of money.

The extra leverage increases the underlying volatility. which is good if the investment goes up, but bad if it drops. Let’s suppose in the example above, the investor’s stock portfolio drops by 10%. The leverage has doubled the investor’s loss to 20%, so his or her equity investment of $100,000 is only worth $80,000. Borrowing money can also cause an investor to lose control of his or her investments. As an example, an investor who borrows $100,000 against the equity of his or her home might be forced to sell the investments if the bank calls the loan. The extra leverage also increases the portfolio’s overall risk. (For more insight, read Margin Trading .)

3. Putting a Client In High-Cost Investments

It is a truism that financial advisors looking to maximize the revenues from a client do not look for low-cost solutions. As an example, a client who seldom trades might be steered into a fee-based account, adding to the investor’s overall cost but benefiting the advisor. An unscrupulous advisor might recommend a complicated structured investment product to unsophisticated investors because it will generate high commissions and trailer fees for the advisor. Many of the products have built-in fees, so investors are not even aware of the charges. In the end, high fees can eventually erode the future performance of the portfolio and enrich the advisor.

4. Selling What Clients Want, Not What They Need

Mutual funds as well as many other investments are sold rather than bought. Rather than provide investment solutions that meet a client’s objective, a self-interested advisor may sell what the client wants. The sales process is made easier and more efficient for the advisor by recommending investments to the client that the advisor knows the client will buy, even if they are not in the client’s best interest.

As an example, a client concerned about market losses may buy expensive structured investment products, although a well-diversified portfolio would accomplish the same thing with lower costs and more upside. A client who is looking for a speculative investment that might double in price would be better off with something with lower risk. As a result, those investors who are sold products that appeal to their emotions might end up with investments that are, in the end, inappropriate. Their investments are not aligned to their long-term objectives, which might result in too much portfolio risk. (For related reading, check out Why Fund Managers Risk Too Much .)