Over lunch a friend tells you about an investment he’s bought that’s making great returns. Over the past month it’s returned over 30%! He tells you of some other friends you have in common that are experiencing similar results. “What’s the catch?” you ask. “There isn’t one,” he explains. The investment is guaranteed not to lose money. “How does it make money?” you ask. You’re friend says he’s not exactly sure, but it involves something high tech. He can direct you to a web site (or a sales rep) with all the answers. Just be sure to mention his name because he gets a bonus for bringing in new investors. The scenario above happens every day in our country and around the world. Given the facts above, our first thought is that this is a scam. During our time in this industry, we have personally helped people avoid at least three such scams before they were publically exposed. How did we do it? Well, it wasn’t from trying to debunk the particulars of each scam. Instead, we followed a few simple common sense principles. The following are some basic questions to ask when considering getting involved in any investment deal. Continue reading
Financial advisors know people want superior investment performance for reasonable risk and expense. Advisors use a variety of sales tactics for making this claim and the less ethical the advisor the bigger the claim. For example, an advisor may claim his performance ranks in the top 1% of all advisors in the country. The claim is verbal and no documentation is provided so this is a safe sales tactic for the advisor. If investors are gullible enough, they may just select this advisor based on a false claim of high performance for low risk and expense. Remember, 11,000 people turned their assets over to Bernie Madoff. Continue reading
In a recent Investor Watchdog survey we uncovered an investor belief that could badly damage their financial interests. Investors did not believe they had a right to ask their current financial advisors specific types of questions.
Investors did not ask these questions for two primary reasons. First, they consider their advisors to be friends and friends do not ask friends certain types of questions. Second, they did not believe they had to ask questions because that was the responsibility of the regulatory agencies. If something flagrant happened, the advisor would be kicked out of the financial services industry. Both of these perceptions are wrong. Continue reading
Whistleblower law firm Labaton Sucharow released a survey on July 10, 2012 that showed 25% of Wall Street executives see wrongdoing as a key to success. The survey included 500 senior executives in the United States and the UK. 30% also said their compensation plans created pressure to compromise ethical standards or violate laws. The survey confirms something I already believed. Wall Street has to cheat to win because it cannot meet the investor expectations it created with slick marketing and personable financial advisors. Continue reading
There are several regulators (SEC, FINRA, State Securities Commissioners) that audit financial advisory firms on a regular basis; for example every four or five years. The purpose of the audit is to make sure the firms and their representatives are following the rules. A second goal is to identify problems before they damage investors.
In addition to periodic audits, the regulatory agencies receive thousands of complaints per year from investors who believe they have been damaged by investment firms and their representatives. Many of the complaints are frivolous – that is, investors lost money in down markets and the representative did nothing wrong. But, at the other end of the spectrum is criminal wrongdoing. Continue reading
Financial advisors provide track records that are supposed to document the past performance of their current clients. They know investors are prone to selecting advisors with the best track records, but what if the track records aren’t real? Bernie Madoff marketed a fake record. Investors are in big trouble if they select advisors who manufacture track records to gain control of their assets. Continue reading
Insider trading is illegal and morally wrong. Unless of course if you are a member of Congress. Then it is just “honest graft” which sounds innocent enough. Honest graft allows members of Congress to enrich themselves in a way that is legal and for which a politician would say is nothing more than taking advantage of the money-making opportunities that might arise while holding public office. Honest graft is as much an oxymoron as “harmless embezzlement.”
Should we allow college athletes to bet and gamble on games in which they are playing? Is it acceptable for Tiger Woods to wager on PGA tournaments in which he is competing? Of course not. It would undermine the integrity of the game. People would scream with outrage that these athletes have a stake in the outcome and staggering financial conflicts of interest. But this is exactly what we are allowing politicians in Washington to do. Currently, members of Congress are allowed to introduce a piece of legislation and then trade on the company’s stock that will benefit or be hurt by this legislation. Insider trading in Congress is not only routine but apparently legal. Committee members frequently participate in sweetheart IPOs and make trades in stocks on the companies they regulate.
If you are a federal judge who owns more than $25 worth of stock in a company, you are required to recuse yourself from any case involving your company because of a possible conflict of interest or lack of impartiality. Yet, we allow members of Congress who own millions of dollars of healthcare or energy companies to write bills that affect their respective industries they regulate and subsequently make trades based on what’s in these bills before this information is released to the public.
Two or three lines in an energy bill can have a massive effect on a company’s stock price. If politicians possess this information and are allowed to trade on it before anyone else, they have an unfair and powerful advantage. It damages the integrity of the markets; it undermines any sense of fairness; and it puts the average investor at an extreme disadvantage.
The much ballyhooed (by politicians) “Stop Trading on Congressional Knowledge” (STOCK) Act would be an attempt at prohibiting Members of Congress, employees of Congress, and all federal employees from using any nonpublic information derived from the individual’s position as a Member of Congress or employee of Congress.
Both chambers almost unanimously passed the STOCK Act, but there is still no law. And according to experts even if it becomes law there appears to be sufficient holes in the STOCK Act such that those who wish to circumvent it will be able to do so. For instance, House Majority Leader Eric Cantor stripped a provision requiring those that collect financial information and sell it to Wall Street to register the same way lobbyists do, which means it’s still okay to provide insider legislative knowledge to ultra-high-net worth investors.
With a Congress like this who needs Bernie Madoff?
The financial service industry figured out investors trust people they like. Once trust is established advisors can sell the products that make them and their firms the most money.
Does this mean all friendly advisors develop relationships with investors to take advantage of them? Of course not! A lot of competent, ethical advisors are very nice people.
However, consider this a warning. Not all nice friendly advisors are the competent, trustworthy professionals they purport to be. Just ask Bernie Madoff’s clients.
Investors would be way better off if they entered into business relationships versus personal relationships with their advisors.
If you’re considering hiring a financial advisor or financial planner, here are five things you should avoid during your selection process.
1. Never limit your hiring criteria solely on where the advisor is located in relation to where you live. You should always look for the most competent financial professional vs. the most convenient.
2. Don’t hire someone because they were referred to you by a friend or family member. Remember that it’s your money so you don’t know how your friend or family member determined that this professional was right for them. Conduct your own due diligence and make your own interview questions rather than counting on someone else’s hiring process. Word of mouth referrals can be very dangerous…think of Bernie Madoff’s victims.
3. Don’t limit your interview process to only one advisor. Yes, it will take some time, but remember that this is your financial future we’re talking about here. You should interview at least three financial professionals. Having a choice is very important so you can compare apples to apples. Use the same interview questions for each advisor.
4. Don’t hire an advisor solely based on his/her pitch to you. Be sure you obtain written documentation from each advisor regarding his/her backgrounds, experience, credentials, business practices, compensation, conflicts of interest, etc. Having this in writing is key. Also consider doing a background check on the person to ensure there are no hidden skeletons in the closet (prior convictions, bankruptcy, liens, compliance issues). Know who you are hiring!
5. Don’t hire a financial advisor or financial planner because they are nice and personable. There’s nothing wrong with liking your advisor, however, you should never hire just because you like them. Being nice doesn’t always equate to competence. Many highly competent financial professionals are very quantitative and detail oriented. I’d much rather have this skill set managing my financial future, personally!
Here’s another sad but true story of investors who were taken to the cleaners by a ponzi operator. Giuseppe Viola is accused of running a ponzi in North Beach, a well known San Francisco neighborhood.
Like so many other ponzi operators, he promised investors returns of 20-25% on their investments, was a very good name dropper, and was very personable. What makes this case so tragic is that Viola had a criminal record (fraud) in Arizona and he also served time in jail for another fraud in the 80s’.
Had any of these investors requested documentation from Mr. Viola about his background, credentials, experience and business ethics, this could have been prevented. What would have been even better was if the investors has requested a background check on Mr. Viola. They would have learned much about him and hopefully would have made better decisions about their money.