Beware of Financial Fraud

Tips to keep your money safe when you work with an adviser.

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Roger Wohlner

Financial fraud is rampant today. Besides high profile cases like Bernard Madoff or Allen Stanford investors are being defrauded out of their hard-earned money at an alarming rate.

Sadly even two former presidents of The National Association of Personal Financial Advisors, the country’s largest organization of fee-only financial advisers, have been implicated in fraud cases over the past few years. (Full disclosure, I have been a registered NAPFA adviser since 2003.)

CNBC even has a regular show called American Greed that “showcases” financial fraudsters in each hour-long episode. There seems to be no shortage of subjects to profile for new episodes.

While there are no sure-fire ways to protect yourself from financial fraud, here are some tips to help you to reduce the risk:

Insist on a third-party custodian. If a financial adviser suggests that you don’t need to house your investments with a third-party custodian such as Schwab, Fidelity, your bank, Merrill Lynch, etc. I suggest that you run (don’t walk) away from any relationship with this person. This was one of the key elements of Bernard Madoff’s fraud. He sent his own client statements. While a third-party custodian is not fool-proof, you should insist upon this arrangement. Besides receiving an independently prepared statement, you can generally set-up online access. As a financial adviser I can’t imagine doing things any other way.

Read and review your account statements on a regular basis. This is a must-do to catch honest mistakes and potentially fraudulent transactions. Many dishonest financial advisers count on the fact that many clients never look at their statements. Don’t be a victim of fraud due to inattention or laziness.

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Affinity fraud is far too common. Don’t assume that you can trust an adviser just because he or she attends your church or you are in the same Rotary club. Many of Madoff’s victims were members of the Jewish community up and down the East Coast. I’m not saying to disqualify an adviser because he or she is a member of your church, but they should be put to the same level of scrutiny as any other adviser that you would consider. Verify first, then trust.

Don’t succumb to pressure. Be leery of advisers who try to hurry you into an investment. There is no investment that is that time-critical. Investments should be made after careful planning to ensure that they are part of a strategy that is right for you. Don’t let yourself be pressured into doing anything with your money. High pressure often equals a scam.

Don’t invest in what you don’t understand. If you don’t understand an investment vehicle proposed by a financial adviser don’t allow your money to be invested there. Demand he explain the investment to you until you do understand it so that you can make a good decision.

The elderly are especially vulnerable. If you have elderly parents or relatives talk to them about investment scams as many are aimed at seniors. This can be a touchy subject but it is an important one. Sadly a significant percentage of the financial fraud aimed at seniors is perpetrated by family members. Your help here might include protecting these people from other members of your own family.

Stay engaged in the process of managing your money. While it is great to find a trusted adviser, make sure you continue to ask questions about the advice they are providing and why they feel a particular investment or course of action is right for your situation.

Financial and investment fraud is rampant. The steps above can help but overall be diligent about your finances and the people you are trusting to provide you advice. Be especially leery of unsolicited calls urging you to invest in the next hot thing. If something sounds too good to be true it probably is.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans.