“The children of Lucifer are often beautiful—And as we know, they flourish like the green bay tree.”[i] Spoken by Miss Jane Marple in Agatha Christie’s 1965 novel At Bertram’s Hotel
Financial advice can be very, very good. But when it’s bad, it’s horrid. When you get bad advice, you lose your dollars…and your pride. The very people you trust with your life savings steal your money with a smile.
In the town where I practice, a financial advisor moved in, made friends, held swanky events, visited the sick, gave to the poor, established an investment fund, and founded a school…until he was arrested for swindling those “friends.” At his trial, the advisor said he was sorry: “I did love them dearly. My clients were my life. ... I just hope they don’t lose trust in people.” Although my heart goes out to those who lost money because of that advisor, as Paul writes to the Corinthians, “I am not surprised! Even Satan disguises himself as an angel of light.”[ii]
How can you protect yourself from being swindled?
Here are some tips that can help.
Too Good to Be True
If something seems too good to be true, it probably is, especially when it comes to financial return on investment. Although a few people may have the luck to score a windfall, most investors make about the same amount from their money based on the risk level of the investment vehicle they choose. Basically, the safer the investment, the less money you will make. U.S. government bonds are almost risk free, and that’s why you only make about 1% when you invest in them. A corporate bond or biotech stock might give you a 50% return – or the company might go out of business and you would earn no return AND lose the entire amount of principal you invested.
Forbes financial reporter Joan Lappin, in covering the Bernie Madoff scandal, points out that in the Madoff case, the “returns of 15% or so every year were steady as a rock. Absolutely too good to be true. Any professional will tell you that. It’s an old saw, ‘If the returns seem too good to be true, they are too good to be true.” In the Madoff case, the Ponzi scheme he ran was fake, and when it collapsed, his clients lost the money they had invested with him.
Secrecy and Hurrying
Almost any (and probably every!) investment opportunity that requires you to by it right that minute should be avoided. Few of us are in the high-net-worth, fast-breaking opportunity world where a rare, lucrative, quick-turnaround, valid investment vehicle might be offered to us. Even those who are in that category should be wary because few - if any - reasonable financial decisions need to be made immediately. Always take your time to ask questions, think things over, and read the fine print about an investment you might buy.
Also avoid any investment that is a “secret” or is “just for you.” Forensic accountant Tracy Coenen explains that “every long-term fraud scheme lives and dies by the secrecy of those who participate.…Anyone running a legitimately successful business doesn’t have a code of silence. They might not be seeking publicity, but they certainly aren’t going to forbid their clients to talk about how successful they are. When an investor is prohibited from talking about the investment, any reasonable person should know something is amiss.” Coenen is referring specifically to the Madoff case, but her advice applies to any investment you are considering. If you aren’t allowed tell others about it, can’t find information about it easily on the internet, and see no public ads, stay away. Your state securities agency can help here, too – contact them if you have questions about a particular offering.
It would be great if you could count on your “gut” to tell when to buy and when to run. However, gut feelings work best when you are in an environment where you are an expert. I cook a lot, so when my gut feeling says that the water was too cool to make my bread rise properly, I’m right. I’m less of an expert on car maintenance, so that funny sound in my Toyota could mean my coat sleeve is hanging out the door or that the transmission is going.
What types of advisors have the greatest potential for conflicts of interest and bad advice? Paladin Investor Resources suggests consumer avoid advisors who are
Employees of companies that determine what investment types will be sold to investors, such as brand name firms with their own investment products.
Paid with commissions, not fees.
Securities licensed, but are not Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs).
Not acknowledged fiduciaries.
Don’t document their credentials, ethics, and business practices.
How about if you think you are being cheated? Would you tell people about it? Many don’t. The FDIC theorizes, in their consumer report, that shame, embarrassment, denial, and self-blame are contributing factors to non-reporting. If you aren’t sure about an investment you might buy or have already bought, call one of the government agencies listed here. They’ll help.
Take the time to check up on your advisor, your advisory firm, and the investment vehicles they sell. Consumer Reports has great tools for investigating financial professionals. You can scrutinize a broker or brokerage firm by using FINRA's BrokerCheck. That database contains information from the Central Registration Depository on about 1.3 million current and former FINRA-registered brokers and 17,000 current and former FINRA-registered brokerage firms. To check on an investment advisor—an individual or a firm that gives advice about securities—go to the SEC's Investment Advisor Public Disclosure website. You can view a company's Form ADV there to collect information about its business operations and see disclosures of certain disciplinary actions. Call your state securities regulator to verify that an advisor is licensed to sell the investments he or she wants you to buy. You can also find out if an advisor has any complaints or disciplinary actions on record. To find your state regulator go to the NASAA, the website of the North American Securities Administrators Association.
Checks and Balances
It can be tedious, but make a point to look at your financial statements regularly. If you already own a particular investment, read your paper statements and regularly access your statements online. Financial journalist Jack Waymire cautions consumers that they should “receive monthly, quarterly, year-to-date and annual reports that document your performance. The report should provide performance data that is gross and net of all fees so you can see the impact of expenses on your results.”
The Fiduciary Standard
We’ve used the term “fiduciary” here. What is a fiduciary and why is it important? Investopedia defines a fiduciary as a professional who “manages the assets for the benefit of the other person rather than for his or her own profit.” The CERTIFIED FINANCIAL PLANNERS ™ Board considers a fiduciary to be “one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.” These are legal definitions that bind the advisor to act in your best interests, not his or her own, and if the advisor fails to do so, he or she is liable for civil and criminal penalties. Fiduciaries still might offer you investment products that benefit them more than you, but it is illegal for them to do so – unlike broker/dealers who can legally profit from investments that are not right for you. As Jane Setzfund of AARP writes, if your advisory is not a fiduciary, ask about the fees associated with the investment being recommended, how those fees compare with other investments, and if he or she will earn a commission if you choose the investment.
“Educational” Websites and Events with Ulterior Motives
When you do your research, look for un-biased websites, articles, and books. If the U.S. government or agency of the government offers information, you know that they are not trying to sell you anything. Non-profits usually have nothing to gain from connecting with you, so you can feel safe there as well. Our website has a page with unbiased sites that you can visit and not be sold to.
How about a free dinner in exchange for listening to an “educational” seminar? I come from Mennonite people, and I hate to pass up anything free. Complimentary coffee at Publix? Yes, no matter how weak. Free pen? I know I have a drawerful at home, but you never know. EVERY sample at Costco? Well, not anything with fish in it. How about a free dinner at one of the fanciest restaurants in town just for listening to a presentation on retirement planning? For that, I have to say no. Why? Folks, if any finance- or money-related entity offers free breakfast, lunch, or dinner in return for an “educational seminar,” you must say no, even if, as Jane Byrant Quinn writes, “you think you're strong enough to go only for the food.” These sales events try to stick you with expensive products and will often not provide accurate information. The people who offer these meals are trained salespeople, and they know the psychological techniques to get you to buy. They are not necessarily evil or crooked; most have a valid product to sell, but if they are giving a free meal, the product is likely to be overpriced. Also, many of these events are run by young people, and if you are my age, everything young is beautiful. I am much more at risk of parting with my money to help the sales record of an earnest young woman or man like my own daughter or son. . Even financial advice at church can sometimes be suspect. If you attend church-related educational seminars, make sure you understand the true costs of the service or product being sold.
Most investment advisors or financial advisors or financial planners offer a free consultation where you can learn all you need to know about their services. Our firm, Wilson David Investment Advisors, always offers one or more free meetings for potential clients to get to know us. We also hold educational seminars in which sound advice is offered and nothing is for sale. You can find similar events at libraries or given by non-profit groups.
It’s a scary world, and even experts make mistakes and end up being swindled. The investors with Bernie Madoff, the workers at Enron, and many other knowledgeable people have lost money in investments that seemed safe. Being aware is your best defense.
[i] “How art thou fallen from heaven, O Lucifer, son of the morning! How art thou cut down to the ground, which didst weaken the nations!” Isaiah 14:12; “I have seen the wicked in great power, and spreading himself like a green bay tree.” Psalms 37:35
Kathryn Hauer, a Certified Financial Planner™, financial advisor, and tax pro, is an educator who writes about financial literacy. Learn more about ways to improve your financial health and safety at her website.