How to protect your money from scammers
Financial advice can be like Longfellow鈥檚 little girl with the curl. It can be very, very good 鈥� but when it鈥檚 bad, it鈥檚 horrid.
And in some cases, bad advice leads not just to a loss of money, but also to a loss of faith. The very people you trust with your life savings can 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. Then he was arrested for swindling the 鈥渇riends鈥� he had advised. At his trial, he apologized by saying: 鈥淚 did love them dearly. My clients were my life. 鈥� I just hope they don鈥檛 lose trust in people.鈥� Although my heart goes out to those who lost money to that advisor, I realize how easy it is to be seduced by a charming person.
There are ways to protect yourself from scams and swindles. Here are some of the most effective.
Assume it鈥檚 too good to be true
Let 鈥渢oo good to be true鈥� be your default assumption when it comes to promises of a huge, risk-free return on investment. Although a few lucky people may score a windfall, most investors鈥� return is more or less dictated by the risk level of the investment vehicle they choose. Basically, the safer the investment, the less money you鈥檒l make. U.S. government聽聽are almost risk-free, which is why you only make about 1% a year when you invest in them. A corporate bond or biotech stock might give you a 50% return 鈥� or the company might go out of business and you earn no return聽and聽lose everything you invested.
Forbes reporter聽聽notes that in multibillion-dollar-scammer聽supposed investment fund, the 鈥渞eturns of 15% or so every year were steady as a rock. Absolutely too good to be true. Any professional will tell you that. It鈥檚 an old saw: If the returns seem too good to be true, they are too good to be true.鈥� Madoff, of course, was running a聽聽that inevitably collapsed, wiping out many of his clients.
Don鈥檛 be rushed, and don鈥檛 believe in 鈥榮ecrets鈥�
Almost any 鈥� and probably every 鈥� investment opportunity that requires you to聽buy right this minute聽should be avoided. Few of us live 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 do live in that world 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.
Also avoid any investment pitched as a 鈥渟ecret鈥� or an exclusive opportunity just for you. 鈥淓very long-term fraud scheme lives and dies by the secrecy of those who participate,鈥� forensic accountant聽聽says. 鈥淎nyone running a legitimately successful business doesn鈥檛 have a code of silence. They might not be seeking publicity, but they certainly aren鈥檛 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.鈥�
Coenen was referring specifically to the Madoff case, but her advice applies to any investment. If you aren鈥檛 allowed to tell others about it, can鈥檛 find information about it easily on the Internet and see no public advertising, stay away. Your聽聽can help here, too. Contact officials there if you have questions about a particular offering.
Know when (and when not) to follow your gut
It would be great if you could count on your 鈥済ut鈥� to tell you when to buy and when to run. However, gut feelings work best 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鈥檓 probably right. I鈥檓 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?聽聽suggests that consumers 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.
- Charge commissions rather than聽.
- Have a license to sell securities but are not Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs).
- Are not acknowledged fiduciaries.
- Don鈥檛 document their credentials, ethics and business practices.
Run your own background checks
Take the time to check up on your advisor, your advisory firm and the investment vehicles they sell. Consumer Reports has聽聽for investigating financial professionals and recommends that readers check in with the agencies that regulate them. Options at your disposal include:
- , a database that contains information on about 1.3 million current and former brokers and 17,000 current and former brokerage firms.
- , the place to see whether an investment advisor鈥攁n individual or a firm that gives advice about securities 鈥� has been disciplined.
- , the website of the North American Securities Administrators Association, where you can connect with your state securities regulator and verify that an advisor is licensed to sell the investments he or she wants you to buy. You can also find out whether an advisor has any complaints or disciplinary actions on record.
Read your paperwork
It can be tedious, but make a point to review your financial statements regularly. Financial journalist聽聽says consumers should 鈥渞eceive monthly, quarterly, year-to-date and annual reports that document your performance. The report should provide performance data that is gross and net of all fees so you can see the impact of expenses on your results.鈥�
Stick to the fiduciary standard
A financial professional who operates according to the聽聽standard is legally obligated to put the client鈥檚 interests above his or her own. Advisors who are fiduciaries can face civil and criminal penalties if they sell you investment products that benefit them more than you, unlike broker/dealers who can legally profit from investments that are not right for you. As聽聽of AARP writes, if your advisory is not a fiduciary, ask about the fees associated with the investment being recommended, how those fees compare with other investments and whether he or she will earn a commission if you choose the investment.
Beware of 鈥榚ducational鈥� websites and events
When you do your research, look for unbiased websites, articles and books. If a government agency is providing the information, you can assume it鈥檚 not trying to sell you something. Non-profits usually have nothing to gain from connecting with you, so you can feel safe there as well.
How about a free dinner in exchange for listening to an 鈥渆ducational鈥� seminar? I come from Mennonite people, and I hate to pass up anything free. Complimentary coffee? Yes, no matter how weak. How about a free dinner at one of the fanciest restaurants in town just for listening to a presentation on retirement planning? For that, I have to say no.
Why? If any finance- or money-related entity offers free breakfast, lunch, or dinner in return for an 鈥渆ducational seminar,鈥� skip it, even if, as聽聽writes, 鈥測ou think you鈥檙e strong enough to go only for the food.鈥� These sales events try to stick you with expensive products and will often not provide accurate information. The people who offer these meals are trained salespeople, and they know the psychological techniques to get you to buy. They are not necessarily evil or crooked; most have a valid product to sell. But if they are giving you a free meal, the product is likely to be overpriced. Even financial advice given out at a church can sometimes be suspect. If you attend church-related educational seminars, make sure you understand the true costs of the service or product being sold.
The bottom line
It鈥檚 a scary world, and even experts make mistakes and end up being swindled. The investors with Bernie Madoff, the workers at Enron and many other people who thought they knew better have lost money on investments they believed were completely safe.
Being aware is your best defense. Stay safe.
