Monday, January 26, 2009

Investing, Who can you trust

With the news about Bernard Madoff and another “investment manager” Joseph S. Forte who took investors for about 50 million in the Philadelphia area, many investors are asking who you can trust for financial advice. The good news is there are basic things you can do to protect yourself.

Joseph S. Forte was not licensed or registered with the state or federal government. You will find that the majority of individuals committing securities fraud are not licensed or properly registered. This is your first line of defense. Go to the Financial Industry Regulator Authority’s website and use their BrokerCheck tool. This tool will let you know if the individual is registered with FINRA and if they have any violations. It also allows you to look up a registered investment advisor firm who may not be required to be licensed but should be registered. If the RIA has fewer than 25 million dollars under management you will need to check their record with the state government. If the individual is not on record with FINRA or the state you do not want to give them your money.

You want to avoid individuals who make claims that they can provide specific rates of return. An advisor may be able to put you into an investment that will guarantee 4% over 5 years with some strings attached, but if they are claiming market beating returns and above average fixed rates be careful. That leads us to the next line of defense.

Know what your money is invested in. You should receive a report of what investments you are in. The advisor should be able to tell you were your money is and you should receive detailed statements with the holdings. Avoid advisors who claim they can not disclose how or where they invest your money. This is a major red flag.

If the advisor is providing returns to good to be true or if your balance never fluctuates while earning above average returns, fraud is most likely involved. This was the biggest tip off in the Madoff scandal. It is simply impossible to provide above average returns without volatility in your account.

You can also protect yourself by understanding what type of financial service you need. A life insurance agent may be able to provide advice for protecting your family in case of death, but you should not seek tax advice from them. Do not be afraid to ask questions like; how long have you been working in this area of finance, what companies have you worked for in the past, and how are you compensated.

FINRA has a very good section on their website under the tab “Protect Yourself” with many more tips to avoid being scammed. I encourage everyone to read it before working with a financial professional.

As someone who works in the industry I can tell you that the majority of professionals are just that, professionals. They do what they do because they love helping people with their finances and want to build a business doing it. In any business you have a few bad apples that ruin it for the rest. As a consumer you need to protect yourself. Taking the few simple steps mentioned above will help you avoid most of the bad apples.


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