There has certainly been no shortage of bad news on the financial front of late. The financial markets as well as the economy at large continue to present challenges for each of us. To make matters worse, the news has been full of stories of “financial advisers” who have stolen astounding amounts of investor funds. Bernard Madoff has become a household name and set a new standard for scandalous behavior. We are bombarded with stories of companies that have been bailed out with our money only to spend the funds on bonuses and private jets. The end result is that investors have an even harder time trusting our financial markets and those who make their livelihood from helping others navigate them. What’s an investor to do?
As we dissect the schemes these criminals use to defraud their clients, trends emerge that, in retrospect, should tip us off to something being not quite kosher. In the case of Madoff’s clientele, one of the standard rules of investing comes into play. If something seems too good to be true, it probably is. Madoff “guaranteed” his clients a 12% rate of return. There are precious few financial instruments that offer guarantees. Some of them are totally legitimate, so the “G” word does not always mean one should be suspicious. The difference is that you should expect to sacrifice potential return in exchange for this guarantee, meaning the rate will be lower than what you could get by accepting risk and volatility. In the case of Madoff and Co., they guaranteed a rate that was significantly higher than what the financial markets have returned on average over the long haul.
Another area that should raise suspicions is who’s holding the funds. The Custodian is the manager of the assets and the investments themselves. If statements come from XYZ Company, and they are listed as the managers as well as the underlying investments containing those names, this may be a warning sign. You should be able to contact a custodian that is separate in name and location from the office through which you do business, and have them verify that you have an account with them.
Legitimate portfolios will typically have diversified securities in them. At the very least, one should question whether there are conflicts of interest in their asset management. Many accounts which are perfectly legal are full of holdings that benefit the wirehouse and adviser with higher fees and poorer performance than comparable investments. Your adviser’s independence is an important criterion to consider, in general. What constraints do they have when it comes to their investment recommendations? Are they making investments on your behalf or because the home office provides incentives or requires them to do so?
Another important consideration when choosing an adviser is the process they use to uncover your needs, goals, and risk tolerance. Are they looking at the big picture, the objectives you are trying to obtain as a whole or only one small piece of the puzzle? The Certified Financial Board Standards of Engagement should form the basis of your relationship with your adviser (www.cfp.net/learn/knowledgebase.asp?id=2). How much information did they ask for, regarding your overall situation as well as your goals and objectives? Was a financial plan prepared on your behalf that corresponds to the investment recommendations? If not, it would be wise to question whether the advice is the best available.
Most advisors, like the vast majority of other professionals, are not crooks and are looking out for their clients’ best interests. A few bad apples often do cause consumers to distrust entire professions and act in ways that end up hurting, rather than protecting, them. In addition, the recent extreme volatility in the markets should lead us to think differently about how we invest. Follow these steps, and your chances of receiving the best and most objective advice will be quite high. Feel free to contact us anytime to for a second opinion.
Leslie Strebel is an independent financial adviser and Certified Business Coach with The Strebel Planning Group in Ithaca (www.strebelcpa.com).
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Leslie Strebel Comprehensive financial plans for clients who wish to implement strategies for reaching goals in the areas of retirement, education, estate tax, income tax, risk management and investments. I also work extensively with business owners to create high quality and affordable employee benefits programs. Full Profile & Contact Information...
