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Subscribe to RSSCNBC personal finance expert Sharon Epperson says that you can avoid financial abuse by knowing investment pros and cons, avoiding hasty decisions and giving someone financial power of attorney.
One of the biggest threats to your financial security is bad advice you could receive or investments you may make with a financial advisor. The Bernard Madoff case highlighted how important it is to do your homework, since many of the convicted swindler’s clients trusted him and never asked how their investments worked.
In many instances of investment fraud, "90 percent of cases could have been eliminated if investors just asked and checked", says Lori Schock, director of the Office of Investor Education at the Securities and Exchange Commission.
Checking out your financial advisor is critical
A recent study by the CFP Board found more than half of certified financial planners have personally worked with an older client who has been subjected to unfair, deceptive or abusive practices when it comes to the financial advice they received or the financial products they were sold. "Older Americans have already given many years of hard work and dedication - raising families, serving in the military, building businesses - all to become one of our most financially secure generations," says CFP Board CEO Kevin Keller. "This survey reveals the pervasive financial abuse victimizing America’s seniors."
It is not only older Americans who should be wary about financial advisor scams. The CFP Board, a non-profit organization that oversees certification for financial planners, suggests investors take specific steps to avoid falling prey to financial abuse. Click ahead for their advice:
Always verify advisor's background
Check out your advisor's employment history, disciplinary records, and registrations. Investment advisors are licensed to give specific investment advice and owe their clients what is known as "fiduciary duty;" that is, offering clients advice in their "best interest." Brokers, on the other hand, may merely execute suitable securities transactions for their clients. Understand the difference. Brokers are regulated by FINRA; investment advisors are regulated by the SEC and/or a state securities regulator; insurance agents by the state insurance commission in states where they do business; and certified financial planners by the CFP Board, the organization offering that certification. Visit these sites to check your advisor:
Know how advisors are compensated
Advisors should disclose any conflicts of interest (or perceived or potential conflicts) that could impact their recommendations. Find out if a potential advisor is paid by an hourly rate, a flat fee, or a commission on the value of assets they manage for you or on the securities they sell. Also ask for a copy of their Form ADV Part II which outlines an advisor’s services, fees and strategies -- or look it up yourself on the SEC website.
Ask for pros and cons of each investment idea
If you're only hearing the reasons why you should make the investment, you're not getting the full story. You may not know how to choose the right investment; that's why you hire an expert. But you should understand how the investments work. Your advisor should be able to explain the pros and cons of the investment strategy and actual investment products. Ask questions if you don't understand and don't hesitate to get a second opinion.
Pay attention to the paper trail
If statements only come on the advisor's letterhead, that's a red flag. You should get regular statements from independent sources, not only your advisor. Also, never leave blanks on paperwork you fill out. And request for final, submitted copies of paperwork for transactions. Copies for your personal records should always have the word "final" or "submitted" stamped on them.
Never make checks payable to an advisor directly
Always make checks payable to the advisor's business or custodian - not the advisor personally. Don't put yourself in a situation that would give an advisor unlimited access to your money.
Ask if the advisor is audited regularly and if third parties regulate or supervise investments.
If you invest in limited partnerships, real estate, or non-traded securities, verify that the investment manager is audited annually by a reputable independent accounting firm. Also, ask if third parties regulate or supervise investments. You can find out if an investment (stock, bond, mutual fund) is registered with the Securities and Exchange Commission by going to the SEC's EDGAR database. Also check with your state securities regulator. Find contact information for the one in your state at www.nasaa.org. Also read the prospectus for the investment.
Don't make hasty decisions
Don't make major investment decisions immediately after a significant life change, like a divorce or death of a loved one. Ask a trusted family member or friend to help you review materials and make decisions. But also consider fees and timing. Before agreeing to any transaction, ask about the charges you will incur and the exact timing involved.
Designate a financial power of attorney
You overall financial plan should encompass some estate planning as well. A financial power of attorney may be even more important than a will. Designate a friend or relative you trust to handle your investments in case something happens and you are incapable of doing so yourself. The financial power of attorney document not only spells out your wishes - but specifically names who steps in - when it comes to your finances should you become incapacitated.
For more information on protecting yourself against financial abuse, go to www.cfp.net.
You can learn more how to choose a financial adviser and about "Who's Watching Your Money" at yourmoney.cnbc.com.
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Leave a Comment:
Apart from designating a financial proxy, the rest of this advice is anathema to me. I have no financial advisor. And I am old enough to remember when even the term "financial advisor" would have evoked puzzlement. In my time, which was long ago, don't remind me, young people frequently consulted their parents or in-laws or someone else in the family who was known to have a good understanding of money and to give sensible advice if you asked. If your hired "financial advisor" makes a costly mistake, you bear not only that loss but his fee. If I make my own mistake, it is only that loss I incur. Seems obvious to me which way is better.
I agree! Just about every "financial advisor" I have ever met are on their 2nd or 3rd career.
The #1 rule of investing is that if it's difficult to understand then it's best to avoid it.
The #2 rule is to look at the product(s) the company produces... if you and/or your kids/parents don't like it, then likely most other people won't either.
#3 rule is to remember that your kids can borrow for school but you can't borrow for retirement, so pay yourself first your ENTIRE working career.
#4 Always have an emergency fund... even if it's a few thousand $ in the bank and those savings bonds you got as a kid that you COULD cash if necessary. The goal is not to be SO invested that an emergency would force you to sell at the worst time... because emergencies always seem to happen at the worst time!
And 90-95% of your money should be invested for the long haul (less as you get older, naturally, but this 90-95% includes safe short term stuff like money markets too)... but it can be fun to designate 5%-10% as money to play with for "flips" and invest in short-term stuff. It can be fun to have a hunch... say that Facebook was destined to drop quick, and buy $10,000 (or so) in PUTS for the fun of it. THAT WAS/IS FUN!!! (And also smart if you can do this in a tax-deferred manner... like in a IRA.)
A great way to find a registered advisor in your area and avoid red flags is www.BrightScope.com
You can get 3rd party information about an advisors conduct, experience and specialty areas.
You can even ask your financial questions for free, and get answers from top financial advisors.
Best of Luck!
Yep, we better learn how to protect ourselves because if you get scammed you can't count on the law. I know because I got scammed and the police wrote down the report and trew it in a file cabinet. The court accepted that I was right so the judge decided I should claim my money from a company that does not exist.
So learn to protect yourself, this is a new nation where criminals have rights but the regular citizens don't seem to have any.
A good common sense article. Let me add a few tidbit more comments. More money is lost by people trying to get the last bit more intrest on thier money and these are the people the con artist target. The second point is not everyone needs a financial advisor. They need to educate themselves and look after your own money. There is not a person in the world who has better care of your money than you do. Education is the key here.
I believe the old saying is 'pigs get slaughtered, so don't be one'.
The truth!
The gist of the article is that you really need to know what's going on and exactly how anything you are getting yourself involved with works.
For those of us who don't have enough means to worry about any investments let alone a financial adviser, here is a related piece of advice that can still help a person keep from getting 'the shaft':
Looking at a product you may be about to purchase? Examine it until you fully understand what it will and will not do for you 'out of the box'. Most of us know the disappointment in buying something that looked like it would do what we wanted, but either could not meet our needs or else could help us only after we purchased a costly accessory or upgrade. Ouch! The best surprise is no surprise, so make sure your questions are answered to your satisfaction before you plunk down your hard earned cash on something unless the seller makes very clear that they'll gladly refund your money if you're dissatisfied. This means that you need to be especially careful for anything you may be purchasing either second hand or not from a traditional retailer. If the item is not new, you NEED to open the box and verify the completeness and condition of the contents before you take a chance on it if you have any reason to believe it is being sold 'as is' and the sale will be final.
Hopefully this advice will be useful to some folks this article may not have done a whole lot for!
How can you tell a nation of people who voted for Barack Obama not to get scammed? LOL, they already did! Barack Obama IS Chauncey Gardiner. GOOGLE IT!! LOL
'Certified Financial Planners",and the "Securities and Exchange Commission" is a joke. I put investment with Schutter investments for years,now that I'm 64,and ready to retire...guess what? Thre is no money left in the account ! The Schutter Investments told the Securities and Exchange Commission that all my money went for "Adminstrative cost",and it got them my money. Dishonesty is a 'well used system" in the Financial business. If I'd saved my money in a bank account rather than investing it to make more money over the years...I'd still have my money,rather than the investment people who now can drive fancy cars,nice homes,rich vacations on my money the Securities and Exchange Commission gave them. Investing money is a scam,and should be outlawed. We do put people in jail for theft,and fraud...don't we ? or have the rules changed ?
Days before the big crash of 09, SB told me not to put my 401 into a 7% CD. Not doing so was costly. I do my own investing with Scottrade now--that way I have full responsibility for my finances. I'm a little short on oil stocks, but it'll be back up.