Sep. 25, 2012 at 10:53 AM ET
One of the biggest threats to your financial security is bad advice you could receive or investments you may make with a financial advisor. The Bernard Madoff case highlighted how important it is to do your homework, since many of the convicted swindler’s clients trusted him and never asked how their investments worked.
In many instances of investment fraud, "90 percent of cases could have been eliminated if investors just asked and checked", says Lori Schock, director of the Office of Investor Education at the Securities and Exchange Commission.
Checking out your financial advisor is critical
A recent study by the CFP Board found more than half of certified financial planners have personally worked with an older client who has been subjected to unfair, deceptive or abusive practices when it comes to the financial advice they received or the financial products they were sold. "Older Americans have already given many years of hard work and dedication - raising families, serving in the military, building businesses - all to become one of our most financially secure generations," says CFP Board CEO Kevin Keller. "This survey reveals the pervasive financial abuse victimizing America’s seniors."
It is not only older Americans who should be wary about financial advisor scams. The CFP Board, a non-profit organization that oversees certification for financial planners, suggests investors take specific steps to avoid falling prey to financial abuse. Click ahead for their advice:
Always verify advisor's background
Check out your advisor's employment history, disciplinary records, and registrations. Investment advisors are licensed to give specific investment advice and owe their clients what is known as "fiduciary duty;" that is, offering clients advice in their "best interest." Brokers, on the other hand, may merely execute suitable securities transactions for their clients. Understand the difference. Brokers are regulated by FINRA; investment advisors are regulated by the SEC and/or a state securities regulator; insurance agents by the state insurance commission in states where they do business; and certified financial planners by the CFP Board, the organization offering that certification. Visit these sites to check your advisor:
Know how advisors are compensated
Advisors should disclose any conflicts of interest (or perceived or potential conflicts) that could impact their recommendations. Find out if a potential advisor is paid by an hourly rate, a flat fee, or a commission on the value of assets they manage for you or on the securities they sell. Also ask for a copy of their Form ADV Part II which outlines an advisor’s services, fees and strategies -- or look it up yourself on the SEC website.
Ask for pros and cons of each investment idea
If you're only hearing the reasons why you should make the investment, you're not getting the full story. You may not know how to choose the right investment; that's why you hire an expert. But you should understand how the investments work. Your advisor should be able to explain the pros and cons of the investment strategy and actual investment products. Ask questions if you don't understand and don't hesitate to get a second opinion.
Pay attention to the paper trail
If statements only come on the advisor's letterhead, that's a red flag. You should get regular statements from independent sources, not only your advisor. Also, never leave blanks on paperwork you fill out. And request for final, submitted copies of paperwork for transactions. Copies for your personal records should always have the word "final" or "submitted" stamped on them.
Never make checks payable to an advisor directly
Always make checks payable to the advisor's business or custodian - not the advisor personally. Don't put yourself in a situation that would give an advisor unlimited access to your money.
Ask if the advisor is audited regularly and if third parties regulate or supervise investments.
If you invest in limited partnerships, real estate, or non-traded securities, verify that the investment manager is audited annually by a reputable independent accounting firm. Also, ask if third parties regulate or supervise investments. You can find out if an investment (stock, bond, mutual fund) is registered with the Securities and Exchange Commission by going to the SEC's EDGAR database. Also check with your state securities regulator. Find contact information for the one in your state at www.nasaa.org. Also read the prospectus for the investment.
Don't make hasty decisions
Don't make major investment decisions immediately after a significant life change, like a divorce or death of a loved one. Ask a trusted family member or friend to help you review materials and make decisions. But also consider fees and timing. Before agreeing to any transaction, ask about the charges you will incur and the exact timing involved.
Designate a financial power of attorney
You overall financial plan should encompass some estate planning as well. A financial power of attorney may be even more important than a will. Designate a friend or relative you trust to handle your investments in case something happens and you are incapable of doing so yourself. The financial power of attorney document not only spells out your wishes - but specifically names who steps in - when it comes to your finances should you become incapacitated.
For more information on protecting yourself against financial abuse, go to www.cfp.net.
You can learn more how to choose a financial adviser and about "Who's Watching Your Money" at yourmoney.cnbc.com.
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