A Brief Look at What the Government is Doing to Protect Investors
Last week we hosted an educational session on changes in Social Security as well as new investor protections and restrictions for IRAs and 401ks that are set to be implemented by the Department of Labor.
Because of concerns over investor protections and increased reliance on IRAs, 401ks for investors well being in retirement, the federal government is requiring that all representatives providing advice on retirement accounts to act in their clients best interest. In this edition of the “Backstage Pass” we will cover the why and then get into what it means and how to protect yourself.
You should start to hear a lot more in the news about how the federal government and the department of labor are now requiring all advisors for retirement accounts to act as fiduciaries.
As many of you are already aware, registered investment advisors and certified financial planners like us are already held to the fiduciary standard with regard to their interactions with clients. We think it is somewhat shameful that the rest of the industry is balking at the idea of being held to a higher standard. Many proprietary and egregiously priced products will likely find themselves going into extinction by the end of the year. We feel it is important that clients know what they are getting into before they invest in these types of products and we wrote a piece on this a couple of years ago entitled:
Feel free to follow these links to our blog on the Social Security changes that will be in effect later this year as well as the CFP Board’s stance on the upcoming requirement for advisors to act as fiduciaries with regards to retirement advice.
HOW TO PROTECT YOURSELF
Last week, ABC took top ratings in the 10 pm time slot over the other networks with their mini-series “Madoff”. On the surface, Madoff seemed like a guy you could trust. An experienced stockbroker, he once served as chairman of NASDAQ. His wealth management company boasted of consistent gains, building a lucrative roster of rich and famous clients. He seemed to take pleasure in helping clients, employees and charities.
As everyone would find out, the "respected broker" would reveal himself to be the most infamous fraudster in US History. He orchestrated an elaborate Ponzi scheme that pilfered over $50 Billion. On a positive note, a court appointed trustee is well on his way to recovering most of the investors’ original principal. The same cannot be said for victims of another well publicized Ponzi scheme engineered by Allen Stanford.
Allen Stanford, a Texas financier, defrauded over 28,000 clients of over $7 Billion. Many of his clients were retired oil workers whom he lured with certificates of deposit from a bank in Antigua. It turns out that investors money was used to fund Stanford’s lavish lifestyle. As of 2014, attorneys had recovered less than one cent on every dollar of investors’ money.
While the threat of having one’s life savings swindled may elicit fear, here are 6 ways to protect yourself from falling victim to an unscrupulous agent.
- Make sure your funds will be kept with a third-party custodian. Bernie Madoff had set up his own brokerage firm to hold client funds. Any deposits you make for investment should be made out to a financial institution (ala TD Ameritrade, Fidelity, LPL Financial, Schwaab, etc.). It is also important to verify the custodian has adequate SIPC coverage that protects investors in the case of bankruptcy, fraud, etc. If you are paying for financial planning services, it is ok to make checks payable directly to your advisor or the company he works for. You can read more at http://www.sipc.org.
- Do your homework on your potential advisor. Ask for references and investigate the advisor’s background and credentials to make sure everything adds up. Check them out on http://brokercheck.finra.org/ and http://www.cfp.net/utility/verify-an-individual-s-cfp-certification-and-background.
- Make sure you understand your advisor’s investment strategy. Madoff wasn’t promising his clients huge returns, just overly consistent returns every year without any losses. You should be skeptical if your advisor’s strategy couldn’t be easily explained to a 5th If it sounds “too good to be true” you may want to do further research.
- Verify that you will receive financial statements regularly and that you will be able to withdraw funds if need be. It could be a red flag if you can’t easily see what is going on in your account or if accessing your money seems difficult or is overly restrictive.
- Be skeptical of appeals to a particular religious or ethnic background. Charles Ponzi preyed on the Italian heritage of his victims. Madoff played the "Jewish card" and attracted a clientele heavily comprised of high net worth individuals from Jewish charities, businesses and foundations. Carefully review all of the facts to make sure you are making a good financial decision, not just an emotional one.
- Learn tricks many savvy charlatans use to dupe unsuspecting investors. People are conditioned to see what they want to see and many take advantage of certain investors inherent biases and turn their fears (or greediness) against them. Next week we will be covering many of these types of blind spots and mental tricks that get a lot of people in trouble. Many investors unintentionally shoot themselves in the foot. Others are influenced by a less than ethical product representatives giving them everything they always wanted, knowing the products or services will eventually fail to deliver. You may be surprised at how easily you come to the wrong conclusions when the evidences look so compelling.
While entrusting one’s nest egg to a professional advisor may seem like a risky move in light of the Madoff and Stanford cases, it is often a necessary step for those that lack the knowledge, experience, or desire to personally manage their own finances. Just as most of us take extra precaution when making purchases electronically, investors should do their due diligence when seeking financial and investment advice as well. In addition to the steps listed above, you may want also want to check out this video to help determine if your advisor is required to act in your best interest or not.
Data as of 2/5/2016
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