Following the Record-Eagle’s recent story concerning local victims of financial fraud, a refresher on how to help protect against these types of scam artists is timely.
Building a wall of defense starts and ends with educating yourself. The principles described below will help to make you a less-than-perfect victim and discourage crooks from preying upon you or your loved ones.
Make sure your accounts are titled in your name only. Your money should never be commingled with your adviser's money. This means your accounts should never be co-owned with your adviser. It also means you should never write a check to your adviser or their business that is meant strictly for investment in your own account. Keep your money separate and always titled in your name.
Limit the legal powers you grant to your advisers. Under no circumstances should you grant "full" power-of-attorney to your advisers. Granting them "limited" powers is the most you should ever authorize. Limited powers might enable them to research something for you or allow your adviser to manage your investments held inside your accounts. In contrast, granting them full power basically allows them to act as if they are you. This is totally and completely off limits.
Be sure your account statements are generated by a third-party custodian. This custodian may be a brokerage firm, a bank or an insurance company. If your adviser creates or sends the official account statements out of their own local office, immediately recognize this as a risk.
Remember Bernie Madoff’s scam? He acted both as the adviser and as the custodian. This dual role is a big, flapping, red flag.
Demand timely answers and accept nothing less. While some investments fail, there is never a reason for you to accept evasive behavior from your advisers. If you feel ill-prepared to understand their explanations, enlist a friend or relative with more financial acumen. Decent and honest advisers are very supportive of you seeking outside support. An advisor worthy of suspicion will often act defensive and offended at the mere suggestion. Watch the reaction.
Never confuse friendly with honest. By definition, almost all swindlers and crooks are later described by their victims as quite charming and helpful people. That's how they ply their trade. Now, it is not wrong for advisers to be charming and helpful. It is, however, a warning sign if they are laying on the charm while simultaneously denying you basic investor protections.
While applying common sense and a healthy dose of skepticism will always remain your first lines of defense, the best scam artists actually exploit your gut instincts. Armed with the combination of these non-negotiable protections, you can rest assured that criminals will quickly slither their way toward easier and less-educated prey.
Jason P. Tank is a Chartered Financial Analyst and co-owner of Front Street Wealth Management, a fee-only wealth advisory firm located in Traverse City. He encourages questions and comments about future columns. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com