Part 1 of the The Never-Do List – 22 Good Ways to Avoid Financial Advisor and Investment Counselor Frauds and Scams
This article discusses things that you should “never do” with a financial planner or investment advisor, and it covers adviser selection, contracts, signatures, and ownership title of your assets.
You should never do certain things with a financial planning or investment adviser. This “never-do” list cannot guarantee that you avoid problems with an adviser. However, it could help to reduce substantially the chances of experiencing problems, financial frauds, and investment scams.
The Skilled Investor’s list of “never-dos” with an adviser has been split into several articles. For other articles see,
Avoiding financial planning and investment advisor frauds and scams – Overview
22 Good Ways to Avoid Financial Advisor Frauds and Scams – The “Never-do” list, Part 2
22 Good Ways to Avoid Financial Advisor Frauds and Scams – The “Never-do” list, Part 3
Many of the items listed are either illegal or widely viewed as unethical. However, legality or ethics will not stop a crook. Others of these practices are legitimate and frequently encountered in the advisory industry, but they are potentially subject to abuse. If an advisor suggests listed items, you should have heightened concern, and you should not ignore the matter. If the adviser does not have a good explanation and you remain uncomfortable, find another adviser.
Selection of a Financial Advisor and Investment Counselor
NEVER look for an advisor until you have done a preliminary assessment of your needs and know the type of advisor you are looking for.
For ideas on selecting an advisor, see the links to The Skilled Investor’s advisor selection at the bottom of this article.
NEVER begin working with an advisor until you have thoroughly investigated his or her background and credentials. This involves doing most, if not all, of the following:
- Get leads for potential advisors from certification organizations.
See: Private certifications of financial planners and investment advisors and Widely recognized private financial and investment advisor certifications
Obtain leads from respected business associates and friends – but only if those persons themselves have thoroughly investigated their advisors and have been very pleased with the services provided over a long period of time
- Interview at least three advisors
Be particularly thorough about this process, because the references provided to you could be associates of the “advisor” rather than true customers. If you ask probing questions, you are more likely to reveal any deceit.
Just because a friend, neighbor, or member of a group that you belong to recommends someone, do not trust automatically without checking other sources. Some of the biggest, “hundred million dollar” frauds have happened, because groups of affiliated people relied upon each other to build trust, when not one of them had really done any independent background checks on the person who committed the fraud.
- Check an advisor’s registration, licenses, and certifications.
Call or use the websites of appropriate national and state regulators to ensure that your advisor has the necessary registration and licenses to operate. Check for any disciplinary actions.
To do this, begin with The Skilled Investor’s overview on advisor regulation, licensing, and certifications: Regulation of financial planners and investment advisors – Introduction
- Call at least one of the educational institutions from which the advisor claims to have been granted a degree. Confirm that the advisor did attend and actually received the degree.
Financial Planning and Investment Advisor Contracts
NEVER work with an advisor without a written and signed contract specifying the services to be rendered, the cost of those services, how the advisor will be compensated, etc.
NEVER commit to a contract that does not allow either party to terminate the contract quickly without anything more than a very small administrative termination charge.
There should not be a significant financial termination penalty. Of course, any acceptable work performed prior to termination would require payment. If prepayments have been made, then there should be provision for automatic refunds on work not yet performed. In fact, you should resist making significant prepayments for services (see “Payments” in Avoiding advisor frauds and scams – The “Never-do” list, Part 2).
NEVER allow your agreements with an advisor to be transferred or assigned to another advisor without your written consent. Under such circumstances, you should be allowed to terminate the contract without any penalty.
If your advisor wishes to sell his or her business including your contract, the transfer should be voluntary on your part. If you consent, your current advisor should facilitate the transfer process and ensure that the transfer is in your best interests. Your advisor will benefit from the sale of his practice and your relationship with him is part of the underlying value for which the acquirer is paying. Your advisor should clearly explain the value to you of entering into a relationship with the new practice owner and should help to smooth the transfer.
NEVER give your advisor power of attorney or legal authority to sign anything on your behalf.
Note that it is also wise to keep certain financial relationships separate. For example, a planning or investment advisor should not also serve as an executor or trustee of any of your legal arrangements. There could be exceptions with very long term and trusted advisors. However, if you have such a relationship with a trusted advisor, you are probably not reading this article.
NEVER sign blank or partially completed documents to be filled out by your advisor later.
Get a copy of all completed and signed documents with original signatures before you leave the office. If there is a problem in the future, you have a copy of your document for comparison.
NEVER work with an advisor who does not provide regular, timely, and accurate statements of your accounts, if your agreement calls for your advisor to manage accounts for you.
Asset Ownership Title and Beneficiary Status
NEVER allow your advisor to share ownership title or have beneficiary status in any of your accounts — never, ever
NEVER allow the primary mailing address for any of your accounts to be that of your advisor.
The primary account mailing address should always be your permanent address. You should receive all account statements and notifications directly. You might authorize that copies be sent to your advisor, but your advisor should not be allowed to make any changes to the provisions governing your account without your written approval.
Preparing to interview a financial planner or investment advisor
Questions to ask, when hiring an advisor – Part 1, Background and training
Questions to ask, when hiring an advisor – Part 2, Fees and contracts
Questions to ask, when hiring an advisor – Part 3, Services and references
See these related articles on advisor selection:
Tags: investment advisor
Personal Financial Planning
- Fund Authority Scores for Stock ETFs and Mutual Funds – Management expenses, sales loads, and trading cost factors (
Fund Authority Scores range from -10 to +10 and measure five factors for diversified stock or equity investment funds: 1) annualized management and sales expenses, 2) trading costs, 3) historical performance, 4) fund maturity, and 5) operating efficiency.
Go to Part 2 -->>
This article explains how Fund Authority Scores rate stock or equity mutual funds and [...])
- Earned Income Drives the Personal Finances of Most People (Do-It-Yourself Financial Planning - Earned income drives the personal finances of most people
The ability to project your various income sources automatically over your lifetime is one of the first steps in creating a useful do-it-yourself personal financial plan. Whether from wages and salary or from self-employment, personal earned income drives the lifetime finances of most [...])
- Traditional IRA and 401k Versus Roth IRA and Roth 401k Contributions (Traditional IRA and 401k versus Roth IRA and Roth 401(k) plan contributions
Many taxpayers puzzle over whether to contribute to traditional versus Roth tax-advantaged retirement plans. For most people, contributions to traditional tax-advantaged plans will probably provide a higher net present value over their lifetimes.
Given our tax-related software modeling capabilities, The Skilled Investor has some observations [...])
- Fee-Only Compensation Aligns the Interests of Clients and their Financial Advisors (Several important considerations favor using fee-only financial advisors over advisors and investment counselors who accept third party commissions and other payments.
Fee-only payment arrangements with advisors allow clients to: 1) maintain trust and reduce unethical behavior, 2) separate financial decisions from purchases, and 3) obtain lower cost financial products. Percent of asset fees align client and [...])
- Choose Lower Mutual Fund and ETF Management Fees (Choose mutual funds and ETFs with MUCH LOWER investment management expenses
Investment fund management fees can only be justified by individual investors, if higher net returns more than compensate for these fees. Sadly, this is most often not the case with actively managed equity and bond mutual funds and exchange-traded funds (ETFs). In addition, you have [...])
- Fee-Only Financial Planner and Investment Advisor Groups (
Members of certain financial and investment advisory groups have chosen to work with their clients solely on a client-paid "fee-only" basis.
Members of certain fee-only advisory organizations have pledged to work with their clients through fee-only compensation arrangements. These organizations do not issue certifications. They are membership organizations.
National Association of Personal Financial Advisors (NAPFA)
NAPFA registered financial [...])
- Schwab S&P 500 Index Fund – Select Shares (SWPPX) capture the Best +10 Fund Authority Score (
Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise, objective, and realistic summaries of mutual funds and ETFs for comparisons within [...])
- Can you really beat the stock market? (
You are not likely to beat the stock market, despite all the cheer leading from the securities industry and the financial media.
When you try to beat the public securities markets, unfortunately you are more likely to trail the market’s return, because of extra costs, taxes, and investment mistakes.
The idea that investors can beat the market [...])
- Fidelity Contrafund (FCNTX) gains a +5 Fund Authority Score (
The diversified investment fund strategy of the Fidelity Contrafund (FCNTX)
According to its prospectus filing on the U.S. Securities and Exchange Commission EDGAR system, the investment strategy of the Fidelity Contrafund is to invest primarily in common stocks and particularly in the "securities of companies whose value Fidelity Management & Research Company believes is not fully [...])
- Monitor and adjust your financial plan in a time-efficient manner – Step 9 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION
Time in life is the most precious and perishable asset that a person has. It should be spent enjoyably and efficiently. Scientific investment strategies that rely on relatively efficient financial markets allow people to minimize their time [...])
- The Biggest Personal Finance Story of the Past 30 Years – Part 3 (< <-- Go to Part 2
The Biggest Personal Finance Story of the Past 30 Years - Part 3
There is no reason to believe that industry self-regulation or governmental regulation will ever fix these problems. Only those individuals who become wise enough to be proactive and seek out lower cost financial products will stop getting fleeced. [...])
- Part 2 of the Biggest Personal Finance Story of the Past 30 Years (< -- Go to Part 1
The Biggest Personal Finance Story of the Past 30 Years - Part 2
To understand what has happened to the market valuation of the financial services sector, particularly over the last 30 years, you should view Figure 4 on page 16 of the financial study by Jeremy Siegel and Jeremy Schwartz [...])
- Screening Index Mutual Funds with IndexUniverse.com (Screening index mutual funds on-line with IndexUniverse.com
In this article, The Skilled Investor discusses how to screen index mutual funds on-line. This article focuses on using the free index mutual fund screener and database available at IndexUniverse.com.
We also discuss how to apply our seven scientifically based mutual fund screening criteria.
In a previous article, The Skilled Investor [...])
- The Economics of the Financial Investment Advisory Industry (Everyone has similar, yet distinct, financial planning needs regarding their families' financial futures.
While more wealthy people (think millions of dollars) have greater complexity to their financial affairs (caused largely by our incredibly convoluted U.S. personal tax codes), everyone needs sophisticated financial lifecycle planning. Whether wealthy or not yet wealthy, families need a personalized way to [...])
- Early Retirement for Renters through Investment Cost Reductions (Early retirement for renters due to investment cost improvements and higher savings rates
Improving on Fran and Fred's lifetime financial plan with earlier retirement
Fran and Fred Frugal, both age 30, are a married working couple with $100,000 in combined annual earned income. They want to understand how valuable different personal finance strategies could be to their [...])