My original inspiration for the above tweet was a pro bono financial counseling event in which I participated about 15 years ago. I counseled a young couple with two young kids. A registered rep from their church had sold all four of them a variable annuity product. For the life of me I can’t come up with a good reason for a 7 and a 9 year old to buy a variable annuity policy. I was trying to be diplomatic in my answers when the wife said to me “…we really got _____ed…” It was hard to disagree.
On a positive note, a client once asked me to review a long-term care insurance policy they were considering that was offered by an insurance company affiliated with their religious persuasion. The policy had excellent features, the company was solid, and the price was competitive. They purchased the policy.
Here are a few examples of affinity fraud from a Wikipedia article on the subject:
- “Baptist investors lose over $3.5 Million”: The victims of this fraud were mainly African-American Baptists, many of whom were elderly and disabled, as well as a number of Baptist churches and religious organizations located in a number of states. The promoter (Randolph, who was a minister himself and who is currently in jail) promised returns ranging between 7 and 30%, but in reality was operating a Ponzi scheme. In addition to a jail sentence, Randolph was ordered to pay $1 million in the SEC’s civil action.
- On November 16, 2007, Michael Owen Traynor a Bradenton, Florida, investment broker, who had found many of his clients though his church and private school social circles, was arrested on a first degree felony grand theft charge that he had stolen $6.5 million from his investors. It is believed Traynor stole funds from at least 34 clients in Sarasota, Manatee and Hillsborough counties between 2001 and February 2007. Traynor was subsequently sentenced to 12 years in Florida state penitentiary.
- “125 members of various Christian churches lose $7.4 million”: The fraudsters allegedly sold members non-existent “prime bank” trading programs by using a sales pitch heavily laden with Biblical references and by enlisting members of the church communities to unwittingly spread the word about the bogus investment.
- On December 11, 2008, Bernard Madoff, an American businessman, was arrested on charges of securities fraud, having been turned in by his own sons after allegedly telling them his business was a “giant ponzi scheme“. According to the New York Post, Madoff “worked the so-called ‘Jewish circuit’ of well-heeled Jews he met at country clubs on Long Island and in Palm Beach.”. Additionally, one of Madoff’s middlemen was J. Ezra Merkin of Ascot Partners. According to Samuel G. Freedman of the New York Times, Merkin was prominent in the Modern Orthodox community. This allowed him to defraud institutions such as Yeshiva University,Kehilath Jeshurun Synagogue, the Maimonides School, Ramaz and the SAR Academy.
Should a religious or other affinity connection disqualify a prospective financial advisor? Of course not. However, this affiliation should not serve to give an advisor or a financial product a free pass either.
In all cases, verify then trust. Check out the advisor and/or the company behind the financial products you are considering. Put them through the same rigor you would if the affinity connection was not there. Tragically there are people who prey on the trust and validity that can come via an affinity connection. Don’t be another victim of affinity fraud.