Bernie Madoff’s Ponzi scheme stole over $65 billion from 11,000 investors. These were successful individuals and institutions with millions to invest, so how did they all miss the signs that Madoff, who died on April 14, was a fraud who was stealing their assets?
The simple answer: they put trust over research. The signs were obvious: Madoff’s FINRA report revealed he’d been censured three times for his trading activities, he’d received fourteen cautionary letters for technical/reporting violations, and was fined $45,000.
If Madoff’s investors did their research, many of them could have avoided him completely. But they didn’t. They trusted Madoff and he abused that trust.
It’s smart business to only ever trust a financial adviser after conducting an objective research process that properly evaluates them. This can be an involved process, but it’s imperative to secure your financial livelihood with the right person. When doing your research, it helps to know who to avoid. Here are sixteen crucial red flags from our book, 5 Steps For Selecting The Best Financial Advisor, for you to consider when looking for a financial adviser.
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Some advisers might lie in order to give themselves additional years of experience or certain certifications they don’t actually have. Don’t just take people at their word, make sure they are who they say are, and that they have the proof to back it up.
Look for consistency in all the records you find, and cross-reference them to make sure everything adds up. Take note if anything looks off, or if you find conflicting information.
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Be wary if a financial adviser is omitting important information about his/her credentials, ethics, business practices, or services.
Keep in mind the following questions when researching the records of advisers across different mediums:
- What services are they offering?
- What credentials do they have?
- What ethics do they claim to uphold?
- How are they promoting themselves across different mediums?
- Are there any discrepancies between their records and listings?
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3. Not acknowledging being a financial fiduciary
Many investors believe being a fiduciary is the most important financial adviser characteristic. Fiduciaries are held to the highest ethical standards in the financial service industry. If your adviser will not acknowledge in writing that he or she is a financial fiduciary, it may be a warning sign.
A fiduciary is a firm or person who legally holds a position of trust to act in your best interest. Who holds a more important position of trust than a financial adviser who will impact when you retire, how you live during retirement, and your financial security late in life when you need it the most?
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4. Negative activity on compliance records
It’s not a good sign if your adviser has one or more complaints, fines, censures, or suspensions on his compliance record.
When researching financial advisers, the FINRA website is one of the first places you should go because you can view their record of compliance. In particular, you should look for any client complaints or disciplinary actions on their records. Complaints can be frivolous or serious, but any history of complaints should at least be a cause for further investigation.
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5. Fake degrees
This is fairly straightforward, but it’s still important. Make sure the university they claim to have graduated from is real, and call them up to verify that the adviser graduated and has the qualifications and honors that they claim.
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6. Fake certifications
For any certifications that an adviser attaches to their name, find the accrediting institution and verify their certified status.
This might sound paranoid, but remember that you could potentially be giving this person your livelihood. In this instance, it pays to be careful.
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7. High returns & low risk
This Madoff-type promise is a blatant scam. The bottom line is you cannot earn high returns with low risk. You have to take substantial risk to earn high returns. Anyone who tells you otherwise is trying to cheat you.
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8. Fake track records
When the adviser uses a reference or mutual fund as a track record it’s wise to keep in mind he or she may have selected the mutual fund after the performance occurred.
Performance reports and track records should be produced by an independent accounting firm — preferably another name-brand firm.
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9. No references
Be wary of any advieor who doesn’t have references, and be sure to check with references to make sure they vouch for the adviser that claims them as a reference.Keep in mind that some references could have been coached by advisers to make the right comments.
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10. Failure to disclose expenses
It’s wise to exclude advisers who are not willing to disclose in writing all of the expenses that will be deducted from your accounts.
Their job as an adviser is to act in your best interest, but you can’t verify that if expenses are not fully disclosed.
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11. Failure to disclose compensation
It’s also wise to exclude advisers who will not disclose in writing how they are compensated, how much they are compensated, and who compensates them.
This helps you verify that the adviser is acting in your best interest, and isn’t disingenuously allocating your assets to investments where they’ve arranged a kickback.
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12. ‘Free’ advice
Avoid advisers who say they provide free advice and services as this can often mean they are being paid by third parties to sell you their products.
The third parties mark up the fees they charge you to recover their marketing expenses.
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13. Free lunch
Some advisers offer to buy lunch to create competitive advantage for themselves when they sell investment services. These advisers might even be trying to make you feel indebted to them.
For this reason, consider going to lunch only after you select an adviser.
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14. No performance reports
Avoid advisers who do not provide performance reports. You will always want to know how your assets are performing in order to gauge the efficacy of your investments. For obvious reasons, any adviser who does not provide performance reports cannot give you the level of transparency that is crucial to making wise, informed, and topical decisions with your assets.
You should highly consider making consistent performance reports a mandatory component of your search for a financial adviser.
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15. Celebrity endorsements
The U.S. Securities and Exchange Commission recently issued a warning that the quality of a financial product is not impacted by a celebrity who is paid a substantial fee to promote it.
That’s straightforward enough. Therefore, you should not rely on public celebrity endorsements to determine your financial adviser either, because that endorsement was potentially only made as a pay-to-play.
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16. No paper trail
Be cautious when all of the information that is provided by the adviser is verbal. In these instances you will have no documentation for your records or your research.
If an adviser is unwilling to provide you with documentation or certification, there’s usually a reason why.
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