Protect yourself against investment fraud
Posted by Gabriel F. Burczyk on 2/23/09 9:52 am
When I started out in the investment world years ago, people were most interested in getting a return on their money. Today, it seems, investors are just happy to get their money returned.
Money managers are under great pressure these days to invest money prudently. And they should be. But the responsibility to ensure that you’ve entrusted your money with a trustworthy money manager…well, that responsibility rests with you, the investor.
At WrapManager, we’ve put a lot of safeguards in place to ensure that your money is protected from fraud and has every opportunity to take advantage of its unique investment potential. But to better shoulder your responsibility as an investor, I offer the following checklists to help you identify the red flags of potential investment fraud.
Money Manager, Financial Planner or Advisor Checklist
- Rely on referrals from people you know. Do NOT rely on referrals given to you by a potential money manager, financial planner or advisor, because they will not refer you to anyone who has anything bad to say about him.
- If a financial advisor has a sketchy past, you can find out about it online. Search www.sec.gov and www.finra.org/brokercheck for information about a potential advisor (and ensure it’s not someone with the same name.)
- Request the financial advisor’s disclosure brochure and read it carefully.
- Your financial advisor should be willing to answer all of your questions and provide information regarding his experience, credentials, and investment recommendations.
- Research all investment products and recommendations: You should be confident in your investments, not just your financial advisor.
- Agree to no more than specific, limited power of attorney, never allow assets to be moved, and never allow money to be wired or checks written to any individual or firm different from the name on your account except with your written approval.
Custodial Account Checklist
- Make sure your money is held in a custodial account by a financial institution or National Chartered Trust Company such as First Clearing, Fidelity, TD Ameritrade, or Charles Schwab. Make sure it’s a real custodial firm, not just a company with a financial-sounding name.
- Your statements should come from this independent custodial firm, not your money manager, financial planner or advisor. You should receive statements no less than quarterly.
- Ensure your account is covered by SIPC protection, as well as independent custodial insurance for amounts that exceed this coverage.
- You should have online access to your custodial account and request copies of signed documents and the firm’s privacy policy.
- Question any investment results that appear too high or too low.
Remember the movie “The Sting” with Robert Redford and Paul Newman? These conmen successfully swindled their mark by gaining his confidence. Consider the insights of Redford’s character (Johnny Hooker):
Doyle Lonnegan: “Your boss is quite a card player, Mr. Kelly; how does he do it?”
Johnny Hooker: “He cheats.”
That means if the investment results appear too good to be true, they probably are. Be alert and aware. Trust, but verify. It’s your money and nobody will watch over it better than you.
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