By Martin Krikorian
Choosing a financial advisor is an important decision. The vast majority of financial advisors are ethical professionals. But as with every profession, there are always exceptions. Dec. 11, 2018 marked the 10th anniversary of the arrest of Bernie Madoff who bilked more than 10,000 investors out of $65 billion
Madoff was later sentenced to 150 years in prison. Last year, two Boston-area financial advisors pleaded guilty to charges that they misappropriated $500,000 in client money for personal investments and expenses. Last month, a financial advisor from Tewksbury was charged by the Massachusetts Securities Division for withdrawing nearly $100,000 for his personal use from a client’s account.
How widespread is this misconduct within the financial advice industry
A major study conducted by three economists from the University of Chicago and University of Minnesota business schools titled “The Market for Financial Adviser Misconduct” reviewed a data base of more than 1.2 million financial advisors between 2005 and 2015. The results of the study showed that 87,000 (one in every 13) registered financial advisors during this period had been disciplined for fraud or misconduct.
How do you find a financial advisor you can trust?
Just because someone appears to be very knowledgeable and has a long list of credentials after his or her name doesn’t make them trustworthy.
While it may be difficult to know what a financial advisor’s real intentions are, there are five flags that could save you from choosing a financial advisor that could be less than trustworthy.
1. Beware of any financial advisor who asks you to make a check payable to them. The only check you should ever make payable to your financial advisor is for an invoice you receive from them for their investment management fee. Any check you write to invest money into your savings or retirement account should only be made payable to an independent custodian (i.e., a brokerage firm such as Schwab, or mutual fund company such as Fidelity or Vanguard) handling your account. With a custodian, the investment assets should be held in an account separate from your financial advisor, and in your name only.
2. Never allow a financial advisor to have full trading authorization or full power of attorney of your account. Full trading authorization allows a financial advisor to withdraw money from a clients account and the check can be made payable to “anyone” including the advisor, and sent to any address. When it comes to managing your assets, allow your financial advisor to only have Limited Trading Authorization. Limited Trading Authorization allows a financial advisor to make trades to your account, and have money withdrawn from the account. The big difference however, is that the check can only be made payable to the client, and can only mailed to the clients address, or linked directly to the clients bank savings or checking account.
3. Always look at your statements. Your financial advisor may send quarterly performance reports or account statements. In many cases of fraud and theft, the financial advisor sent false statements to their clients. The actual custodian holding your assets will send monthly or quarterly statements. Custodians are required to report all activity in your account. These statements can now be compared for any discrepancies with your financial advisors statements.
4. Never work with a financial advisor without a written and signed contract specifying the services to be rendered, the cost of those services, and how the advisor will be compensated. Request they show you not only in percentages, but also in dollars and cents how much it will cost to hire their services. Be sure to ask for all “fees” — front-end loads, back-end loads, commissions, 12b-1 fees, and any other fees that will make up the cost of their services.
5. Trust is important when dealing with a financial advisor, but blind trust can be abused. Before hiring a financial advisor, ask them to provide their answers (in writing) to the following questions. Will you have custody of my investments? Will my account be in my name only? What investment philosophy, strategies, and money management techniques will you use to manage my money? “How do I know you will never embezzle money from my account?
This is your money, and you have every right to ask these questions. You want to make sure that the advisor you select is working in your best interest and that your retirement savings are protected. Any financial advisor should be more than willing to provide you with any regulations and compliance oversight their firm has in place regarding these risks. At the bottom of the form, designate a space for their signature.
If they seem put out by your request, are reluctant, or refuse to sign, keep looking for a financial advisor.
Martin Krikorian is president of Capital Wealth Management, a registered investment adviser providing “fee-only” investment management services located at 9 Billerica Road, Chelmsford. He is the author of the investment books, “10 Chapters to Having a Successful Investment Portfolio” and the “7 Steps to Becoming a Successful Investor.”