How to Avoid Bad Financial Advice and Costly Scams

“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.

Gut Feelings

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 agen