As a financial professional, it has been disheartening to hear the recent stories of theft and fraud by advisors like Bernie Madoff. The fact that he was able to swindle people of such intelligence and financial sophistication is alarming. There were precautions that could have been taken, but when times are good and returns are tempting we tend to get lazy in our diligence. Here’s how to not let that happen to you.
First and foremost, always remember—it’s your money!
Not being good with investments or disliking finance is no excuse. Never completely outsource the management of your money and investments to someone else. I have clients who are do-it-yourselfers who just want a little direction, those who find it valuable to collaborate with me on their finances, and those who want to delegate the paperwork and details that go with their investments. I enjoy working with all of them. But I will not work with a client who doesn’t want to be involved at all. It’s not good for either one of us.
Ask questions. Understand your investments; why you have them, what type they are, what kind of expenses they involve. A large part of my job is educating my clients about what they have and helping them make good choices about where they want to be. Good communication between you and your advisor is crucial; it leaves less room for misunderstanding of your wishes and intentions. The victims in the Madoff scandal were discouraged from asking questions and hesitated to rock the boat.
Open every statement and trade confirmation. Every one. If you don’t understand what the transactions were, ask. Recently an advisor with Schwab wrote large checks to herself out of the accounts of elderly clients over a period of time. Apparently no one noticed or opened the statements. Depending on the type of account you have, you may want to consider requiring your advisor to discuss every trade with you and only allowing non-discretionary trading in your accounts. I do not take discretionary authority in my clients’ accounts because it is my policy that they be part of the process. A good advisor will welcome your questions and appreciate a well informed consumer.
Make sure your money is being held by a third party custodian, not by your advisor. Don’t make any checks payable to him or her. Seems basic, but Madoff’s investors were giving him the money personally. The custodian will take the money in, but prevents the advisor from removing the funds. You should receive statements from that custodian regularly. It’s okay for the advisor to create reports too, but the custodian’s statements show you exactly where your money is positioned. The custodian should also be audited regularly, and by a reputable firm not associated with the advisor or custodian.
If it sounds too good to be true… well then it probably is. We all know the saying, but when someone is telling us good news we want it to be true. Madoff reported almost exclusively positive returns for more than a decade. And a guaranteed return to boot. . Really??
Take your time with new investments. Don’t let anyone rush you; investing is not to be taken lightly and you should understand what you are buying. Every day there is a new “once in a lifetime” opportunity to take advantage of. If you’re not ready for today’s, wait for tomorrow’s. High pressure sales tactics have no place in this business.
Ask about the risks. Every investment has risks, even stuffing the mattress. Find out what they are and determine with your advisor how and if they fit into your overall strategy. If it is an unfamiliar investment, do some research and read the prospectus (put on a pot of coffee first though).
Know who your advisor works for and how he or she gets paid. Our profession traditionally has been very opaque about compensation, and often people think they are getting advice for free. Unless you’re working with a volunteer organization, your advisor is compensated somehow. Commissions, fees, a combination; they are all viable options, but you should know what and how you are paying.
Don’t be afraid to ask for a second opinion—a competent second opinion (not your plumber or neighbor). If you have misgivings, or just want to be sure you’re on the right track, check with another reputable advisor. If you don’t have an advisor and are looking for one, be sure to interview more than one.
Finally, all advisors who offer more than incidental investment advice must be registered with the state or the SEC as investment advisors. Brokers must be registered through FINRA. You can check registrations as well as complaints by visiting: www.advisorinfo.sec.gov for Registered Investment Advisors and http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm for brokers.