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All Contents © 2019The Kiplinger Washington Editors
By Kirk Cassidy, Investment Adviser, President
| September 12, 2017
Most investors worry about losing their money to the market — not to their financial professional.
They assume the person they hired will be trustworthy, capable and always looking out for their best interests. So when they hear about “bad apples” who take clients to the cleaners, they get nervous. And rightly so.
There aren’t that many Bernard Madoffs out there bilking clients out of billions, thank goodness. But even everyday investors with average-sized portfolios are in danger of running into scams and schemes that could drain their life savings. And, as with any line of work, there are some financial professionals who just aren’t very good at the job.
So how can you be sure your adviser is honest, knowledgeable and doing his or her best to keep your money safe? Kirk Cassidy, president of Senior Planning Advisors, shares a few things you can do to protect yourself.
Cassidy is an Investment Adviser Representative and a fiduciary with a Series 65 securities license and life insurance licenses. He is also a national speaker.
There are two standards that regulate the financial industry: suitability and fiduciary. A broker who works under the suitability standard must reasonably believe that the recommendations he makes are suitable for the client’s needs; he doesn’t have to disclose conflicts of interests or all the fees involved in a transaction. A fiduciary, on the other hand, has a duty of loyalty and care; he must act in the best interest of his client and be transparent about all fees and conflicts.
The Department of Labor’s recently implemented fiduciary rule requires all financial professionals to use the higher standard when giving retirement advice, but this protection has not been extended to all transactions. Some advisers will switch hats depending on who they’re working for or what they’re working on, so I believe that to avoid confusion, your best bet is to go with someone who is a fiduciary only.
There are several ways to identify if an adviser is fiduciary. One of the best ways is by doing a broker check on Finra’s website at www.finra.org. The broker check will tell you if an individual is an IA (investment adviser) or a registered rep. If the individual is an IA, they are a fiduciary. If they are a registered rep, they are a broker.
Another way to tell that an individual is a fiduciary is that they are fee-based and work for an RIA (registered investment adviser) firm. Their marketing will include a disclosure that states they are working for an RIA.
Bernie Madoff was operating under the fiduciary label when he stole billions from his clients. One thing that helped him get away with it for so long is that he did not have a custodian — a financial institution that holds customers’ securities for safekeeping to minimize the risk of theft or loss. And because he had complete control of his clients’ money, he could carry on unchecked.
What’s the lesson for investors? Never write a check to an individual or an individual’s firm; it should always be written to that third-party custodian with an account registered in your name — not your adviser’s name or anyone else’s.
Don’t be sucked in by the promises of huge returns sometimes found when investing in private placements. The temptation can be strong to keep investing in something that isn’t registered and performs well initially. We frequently see this in the oil and gas fields and with non-publicly traded real estate investment trusts (REIT). Be disciplined, and know the risks associated with these types of investments. If you are determined to get in, make sure it is a small percentage of your net worth.
Retirement is a time to be hitting singles and doubles, not home runs. When you swing for the fences, you’re more likely to strike out. If something sounds too good to be true, be skeptical.
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Remember: Some of the brightest minds and most sophisticated investors in the world have fallen for Ponzi schemes. One of the challenges of investing is that you often don’t know you’ve made a mistake until it’s too late. This can be especially devastating in retirement, because you no longer have time on your side when it comes to bouncing back from a loss.
Don’t give your adviser free rein over your money, and always look at your statements. When looking at your statements, we recommend checking the titling on the account and making sure it is owned in your name exclusively and confirm that it is being held by a well-known third-party custodian. You should also pay attention to any unusual transactions, including excessive fees and any distributions.
The voluntary Global Investment Performance Standards (GIPS) are based on fundamental principles of full disclosure and fair representation of investment performance results. Firms that are GIPS compliant are encouraged to comply with all applicable requirements for any reports, guidance statements, Q&As, handbooks, etc.
You can check out a list of GIPS-compliant firms at https://www.gipsstandards.org/compliance/Pages/firms_claiming_compliance.aspx.
Of course, the best way to prevent the theft of your money is to get as much education as you can. But that doesn’t mean you should stop paying attention.
If you don’t understand something an adviser suggests, ask questions. If you have a bad feeling about a recommendation, say no. And if you think something isn’t proper, and may even be illegal, get a second opinion.
It’s your right, because it’s your money.
Kim Franke-Folstad contributed to this article.