The Never Do List – Avoid Financial Advisor Frauds and Scams
Part 2 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 fees, payments, and proprietary investments.
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 – Part 1
22 Good Ways to Avoid Financial Advisor Frauds and Scams – 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.
Financial Planner and Investment Counselor Fees
NEVER share investment profits or capital gains with your advisor.
You will never find an advisor who is willing to share in your losses, so why share in your gains? Only more wealthy “accredited” investors who sign documents asserting that they meet certain minimum asset and/or income levels can legally enter into investments that allow profit sharing with others.1 These accredited investors are presumed to be more well-informed investors who can properly assess risky investments. However, it is doubtful whether some accredited individual investors are sufficiently able to assess certain investment risks.
NEVER pay excessive asset management fees.
Before you pay even competitively priced asset management fees be certain that you will receive justifiable value in exchange. Always compare asset management fees with the alternative of paying competitive hourly fees. Your assets represent your hard-earned money. The value of an advisory service should be evaluated in relation to the long-term net returns performance of your assets and not just the total amount of gross assets you possess.
See this article: Excessive costs are a huge problem for individual investors
Payments Made to Financial Planners and Investment Advisors
NEVER make substantial advanced payments to an advisor for work that is not yet completed.
In certain circumstances, prepayments may be appropriate and you can negotiate the amount. Certainly, however, you should not pay more that 50% of any agreed upon fee as a prepayment. In addition, if any prepayment amounts asked were substantial, it would be better to ask that the job be broken down into a series of partial deliverables. You could assess these deliverables and make smaller progress payments.
NEVER make payable to an advisor any check, wire transfer, or other form of payment for any securities, insurance or other purchase.
Make out the check or other form of payment directly to the company from which you are buying a financial product. Your money goes directly to the company supplying the financial product and does not pass through your advisor’s account, where it could be stolen. Only contractually agreed upon planning and investment advisory fees should be paid directly to an advisor. [Note, of course, that you still should check out the investment to ensure that it is legitimate.]
NEVER provide a loan or a loan guarantee to your advisor.
NEVER proceed without a written understanding on whether your advisor can accept third party commissions or payments related to his or her business with you.
See: Does it matter how financial planners and investment advisors are paid? and Financial planner and investment advisor compensation paid by third parties
Avoid Proprietary Investments Sold Through a Financial Planner or Investment Counselor
NEVER buy proprietary investments that are only available through your advisor.
These products, which may include various limited partnerships, can pay high commissions to an advisor, but tend to be poor investments. Such illiquid, proprietary investments are difficult to value and have no ready and competitive resale market.
In general, only invest in securities that are traded in broad public markets. Yes, of course, there are numerous private offerings. These offerings are how many firms get started. However, you should already know whether you are personally sophisticated regarding the evaluation of private business opportunities. If you are not and your only source of information and judgment on a private investment opportunity is the advisor who will be paid by someone else to sell it to you, then the likelihood that you could be duped is higher. Unsophisticated investors should rely on publicly traded securities, because on average public markets tend to do a very good job of establishing the best current risk-adjusted fair market value of a security.
NEVER invest in anything about which there is little or no printed information.
However, even if there are substantial and visually impressive hardcopy materials, you still should check independent sources to insure that this proprietary ‘opportunity’ is legitimate and sensible.
See these related articles on advisor selection:
Tags: management fees
Personal Financial Planning
- Risk-Free Investment Money Is Fantasy Money (
For Individual Investors Risk-Free Investment Money Is Fantasy Money
Securities with low investment risk and high investment returns are just fantasies.
No "risk-free" investment money is consistently and reliably available to individuals. Luck dominates skill in the securities markets. Clever investment selection is vastly over-hyped, and only the promoters tend to benefit. On average over long periods, [...])
- The Heavy Burden of Recurring Investment Expenses and Fees (
The heavy burden of recurring investment fees (Part 1 of 2)
Recurring investment costs can significantly impact the long-term value of your retained investment portfolio assets.
Recurring fees, such as asset management fees, 12b-1 marketing fees, and advisory/asset custody fees are charged periodically, as a percent of your investment assets. The relative cost-efficiency of your investment portfolio [...])
- Financial Planner and Investment Advisor Compensation Paid by Third Parties (There are three primary types of third party or commission-based compensation: commission-only, fee-based commission, and fee-offset commission.
How an advisor is compensated can be a very important issue. With commission-only advisors, there is no direct cost to the client for planning and advice. The advice appears to be free, but it is not. Most clients find [...])
- Insure against risks economically – Step 8 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
While value, affordability, risk exposure, and risk tolerance should affect insurance purchase decisions, insurance is often sold and purchased emotionally. Yet, insurance premium payments reduce personal funds that might otherwise be available for additional investments. Many people [...])
- Avoiding Financial Advisor Frauds and Scams – Part 1 (
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 [...])
- Roth IRA Contributions Versus Traditional IRA Contributions for Renters (Introduction: Roth IRA Contributions versus Traditional IRA Contributions for Renters
In a series of articles, The Skilled Investor compares different lifetime financial planning projections for Fran and Fred Frugal to illustrate the relative value of adopting different financial planning strategies. Fran and Fred, both ages 30, are a married working couple with $100,000 in combined annual [...])
- Summary Table of Traditional IRA and Roth IRA Tax Rules (Summary Table of Traditional IRA and Roth IRA Tax Rules
For your convenience, The Skilled Investor has provided a detailed table that summarizes 2007 rules for traditional IRAs and Roth IRAs.
Because this table has 13 columns and 20 rows, it is too large to be displayed properly in a blog posting. To view this table and [...])
- Fidelity Spartan 500 Index mutual fund (FSMKX) achieves the Best +10 Fund Authority Score (
The Standard & Poors 500 stock index is the most common equity index fund benchmark in the U.S. The S and P 500 tracks about 75% of publicly traded U.S. equity market asset value. The dominant issue in choosing among passively managed index mutual funds and ETF funds benchmarked against the S & P 500 [...])
- Avoid Very Large Actively Managed Mutual Funds (
Avoid very large actively managed mutual funds
Big actively managed mutual fund portfolio positions and higher percentage ownership of any company’s bonds or common stock are not good things for actively managed mutual funds. Nor, are these big positions and high percentages good for you.
Large portfolio size constrains how efficiently an actively managed mutual fund can [...])
- 22 Ways to Avoid Financial Advisor and Investment Counselor Frauds and Scams (Avoiding financial advisor and investment counselor frauds and scams - Overview
The best way to avoid being defrauded or scammed by a financial or investment advisor is to investigate carefully several different advisers before hiring one of them.
If you carefully choose a financial adviser or investment counselor, you have a far greater chance of finding one [...])
- I Write to the President of CitiBank Customer Service (PIRATES OF THE CREDIT SEA -- Part 5: I write to the President of CitiBank Customer Service
My saga to recover my credit card treasure continues. Previous articles have covered the particulars of my situation, and I will not repeat them.
In summary, for fifteen years I have always done my best to conform to my AT&T [...])
- Financial Advisor and Investment Counselor Compensation Paid by Clients (There are three primary types of client paid advisor compensation: hourly-fee, fixed-fee, and asset-fee.
When choosing an advisor, individuals should first decide the type of advisor compensation that makes them most comfortable. How an advisor is compensated can be a very important issue. When you hire a financial planner or investment advisor, 1) you pay directly [...])
- How Expensive is Investment Advisor Compensation Paid via Sales Loads? (Even if you actually are getting good financial advice, paying your investment advisor via a sales load charge is just one of several potential compensation methods.
A sales load might be the method that you prefer to compensate your broker or advisor. If your advisor is truly competent and ethical, he may be able to manage [...])
- How Investment Sales Loads and One Time Investment Fees Work (Understanding one-time investment fees, such as sales loads
Sales load charges and commissions on investment purchases differ from the financial service industry's numerous other recurring methods of charging fees to their retail consumers.
Sales loads are less straightforward to analyze for investment lifetime cost-effectiveness, compared to annually recurring charges. (See: Pay less to get more)
If you have [...])
- 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 [...])
Comments are closed.