Financial fraud is all over the news. Whether high-profile Ponzi Scheme cases via the likes of Madoff or Allen Stanford or many smaller cases; investors are being defrauded out of their hard-earned money at an alarming rate.
I’d like to tell you that the problem emanates only from financial advisors who sell product, but sadly two former presidents of NAPFA the country’s largest organization of fee-only advisors have been implicated in fraud cases over the past few years. Full disclosure, I have been a NAPFA Registered Advisor since 2003.
Given the increasing skill and imagination of fraudsters there is no fool-proof way to protect you and your family from financial fraud. None the less here are some tips for you to reduce the risk:
- If a financial advisor suggests that you don’t need to house your investments with a third-party custodian such as Schwab, Fidelity, your bank, Merrill Lynch, etc. I suggest that you run (don’t walk) away from any relationship with this person. This was one of the key ways in which Madoff was able to perpetrate his fraud for so many years. He sent his own client statements. While a third-party custodian is not fool-proof, you should insist upon this arrangement. Besides receiving an independently prepared statement, you can generally set-up online access. As a financial advisor I can’t imagine doing things any other way.
- Read and review your account statements on a regular basis. Besides being a good practice anyway, this is a must to catch honest mistakes and potentially fraudulent transactions. Case in point was (sadly) another former NAPFA advisor who allegedly took client funds from accounts at Schwab via forging their signatures. I’m sure that he was counting on the fact that many clients never review their account statements. (Post script to this, over the past year I’ve received calls from Schwab on two separate occasions to verify transactions for a client whose signature has changed from what they had on file when we first opened the account.)
- Don’t assume that you can trust an advisor just because he or she attends your church or you are in the same Rotary club. Affinity fraud is far too common. Many of Madoff’s victims were member of the Jewish community up and down the East Coast. I’m not saying to disqualify an advisor because they are a member of your church, but they should be put to the same level of scrutiny as any other advisor that you would consider.
- If an advisor is insistent that you invest NOW, be very leery. There is no investment that is that urgent. Investments should be made after careful planning to ensure that they are part of a strategy that is right for you. Don’t let yourself be pressured into doing anything with your money. High pressure often equals a scam.
- If you don’t understand an investment vehicle proposed by a financial advisor don’t allow your money to be invested there. Demand he explain the investment to you until you do understand it so that you can make a good decision.
- If you have elderly parents or relatives talk to them about investment scams as many are aimed at seniors. While this can be a touchy subject it is an important one. Sadly a high percentage of the financial fraud aimed at seniors is perpetrated by family members. Your help here may include protecting these people from other members of your own family.
- Overall make sure that if you work with a financial advisor that you stay engaged in the process of managing your money. While it is great to find a trusted advisor, make sure you continue to ask questions about the advice they are providing and why they feel a particular investment or course of action is right for your situation.
Financial and investment fraud is rampant. The steps above can help but overall be diligent about your finances and the people you are trusting to provide you advice. Be especially leery of unsolicited calls urging you to invest in the next hot thing. If something sounds too good to be true it probably is.
Please feel free to contact me with your investment and financial planning questions.
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