It seems that every day I read an article or facebook post about an investment adviser defrauding a physician. Unfortunately, adviser fraud comes from all angles. Large investment houses have engaged in it systematically and at an individual adviser level. Professional athletes-turned advisers have committed fraud too. Regional offices certainly have as well. Attorneys and CPAs who provide investment advice have also defrauded their clients. People who somehow manage to get paid to provide investment advice without any sort of qualifications aren’t immune from fraud either.
So what can you do to avoid it? Here are some ideas:
- Empower yourself. The primary reason that this website exists is to empower physicians to make good investment/financial/legal decisions. I want you to know enough to spot when someone is trying to sell you a product or strategy that is too good to be true. I would be thrilled if all of you attained enough knowledge to make your own investment and financial planning decisions and then used me or another independent adviser as a sounding board.
- You don’t need flashy people or methods. If someone is pitching you a method that is “foolproof” or always beats the market, or anything like that, then your best bet is to run away. Most people do not need loaded mutual funds, annuities, expensive life insurance policies, or any other expensive or unusual product or service. You also don’t need to overpay for an adviser. In a future article I will write about luck versus skill in investment management, but for now let’s just say that you do not need to pay an adviser an exorbitant fee just because he or she also represented your dad, currently represents athletes and celebrities, or manages billions of dollars.
- Trust no one. Except me….well, including me. But seriously, get some checks and balances in place. I became a registered investment adviser in part because I felt terrible anytime someone came to me as an attorney having lost a significant amount of money as a result of adviser fraud, when I knew I could provide that service well and ethically. An adviser should have complete loyalty to you and not to a sales goal, an income goal, or a boss. You have worked too hard to earn your savings to trust the wrong person to help manage your assets.
- Consider separating custody of your investments from trading authority over your investments. This means that whatever brokerage or bank has your investments should not be the person making the buy/sell decisions. The reason that the regulations governing people with custody of investors’ assets are so much stricter is because it is easier to commit fraud when you have the ability to touch the client’s money. If your investments are kept by a brokerage or bank, and your adviser is with a separate company that cannot access the funds but only make the trades, or assist you in making the trades, then you have made it much more difficult for your adviser to defraud you. There are some great advisers who will be able to take custody of your investments and will never mistreat you, but if you want to reduce the chances of fraud, then consider this step.
- Read your adviser’s “ADV”, which you can find online, and call your state’s agency that governs investment advisers, to confirm that your adviser has never been disciplined.
When I speak with legal clients or hear stories about adviser fraud, the story almost always includes one of the following: 1) he has represented my family for years, and we trusted him so we didn’t pay much attention; 2) we were so busy and we just never took the time to look at the statements; or 3) he had me convinced that his plan was so foolproof that I never questioned what was happening. I really do not want anyone to lose their hard-earned money because of something like this. If you are concerned about your situation or that of a family member or friend, then at a minimum get a second opinion from a qualified, independent investment adviser.