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: capital gains
Personal Financial Planning
- I Want My Treasure Back Please (PIRATES OF THE CREDIT SEA - Part 3: I want my treasure back!! (Please)
What are my rights in the situation that I summarized in my previous article: "PIRATES OF THE CREDIT SEA: My Treasure Is Taken!"? Well, the answer is very simple. I have a contractual right to get my treasure back. I also have [...])
- American Funds – AMCAP Fund – Class A Shares (AMCPX) fetch a +1 Fund Authority Score (The table below in this article presents The Skilled Investor's Fund Authority Score and other information for the American Funds - AMCAP Fund - Class A Shares.
The diversified investment fund strategy of the American Funds - AMCAP Fund - Class A mutual fund shares (AMCPX)
According to its prospectus filing on the U.S. Securities and Exchange [...])
- Diversify To Avoid Investment Fraud (Another kind of investment diversification that individual investors should consider important relates to the failure or corruption of the financial industry intermediaries and fiduciaries that hold individual investors’ securities.
This meaning of diversification has nothing to do with scientific investment principles related to optimal portfolio diversification. However, it is still very important. Prudent investment practices would [...])
- Passive Index Investment Strategies are Superior (Passive index investment strategies are superior, because they narrow the range of outcomes and lower your investment risk
A previous article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that individuals are much better off with a well-considered financial viewpoint. A stable [...])
- Vanguard Total International Stock Index Fund (VGTSX) lands a +9 Fund Authority Score (The Vanguard Total International Stock Index mutual fund is a low cost alternative for broad, passive index investing internationally. This fund is a composite of three other Vanguard international funds: the Vanguard European Stock Index Fund (55.7%), the Vanguard Pacific Stock Index Fund (24.1%), and the Vanguard Emerging Markets Stock Index Fund (20.2%). The percentages [...])
- Mutual Fund and ETF Screening Requirements (
On-line screening of mutual funds and ETFs: minimum requirements
In this article, The Skilled Investor discusses minimum requirements for on-line mutual fund and ETF screening tools. This article summarizes our seven scientifically based fund selection criteria and reports on our survey of the capabilities of free on-line website tools to do screens using these criteria.
Automated fund [...])
- Avoid Mutual Fund and ETF Sales Commissions and Fees (Avoid mutual funds and ETFs with sales commissions and marketing fees
Summary: There is no convincing evidence that sales loads and other sales fees charged to investors result in higher mutual fund and ETF performance.
In fact, the opposite has repeatedly been proven true with mutual funds, which have a long performance history to evaluate. Paying a [...])
- 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 [...])
- Set a Minimum Portfolio Size Threshold for Mutual Funds and ETFs (
Choose mutual funds and ETFs with a minimum economical portfolio size
If you are going to invest in actively managed funds, then you should want them to have a sufficiently large asset base to fund the necessary research.
If an active fund is too small, then fund management quality can suffer or fees could grow. Index funds [...])
- Make More Optimal Tradeoffs Between Investment Risk and Return (VeriPlan helps you make more optimal decisions about the tradeoffs between investment risk, investment return, and personal savings
Too often decisions about risk-adjusted investing and asset allocation are over-simplified with a few questions about your risk tolerance. Typically, this superficial process will be followed quickly by the offer of a canned, off-the-shelf asset allocation scheme and [...])
- How to distinguish between true investment skill and luck (
Even if an investor has obtained superior results over an extended period, is this sufficient proof that these investment results were actually due to skill rather than just a lucky streak?
No, these investment results could still be due to chance. For example, take a large population, such as all individual investors in the U.S., and [...])
- Hitting the Citibank Stone Wall in Polite Conversation (PIRATES OF THE CREDIT SEA - Part 4: Hitting the Citibank Stone Wall in Polite Conversation
This article continues my personal saga of trying to get Citibank to fix problems with their management of my credit card account with them.
For a summary of the overall situation, go to Part #1: My Treasure Is Taken!
For an article [...])
- USAA S&P 500 Index mutual fund Member Shares (USSPX) capture a +9 Fund Authority Score (The table below in this article presents The Skilled Investor's Fund Authority Score and other information for USAA S&P 500 Index mutual fund Member Shares (USSPX).
The diversified investment fund strategy of the USAA S&P 500 Index mutual fund Member Shares (USSPX)
According to its prospectus filing on the U.S. Securities and Exchange Commission EDGAR system, the [...])
- Fund Authority Scores for Stock ETFs and Mutual Funds – Historical investment performance (
Fund Authority Scores rate stock mutual funds and ETFs on the most important economic factors affecting long term diversified equity investment fund performance. This article explains how historical fund performance is calculated.
<<-- Go to Part 1
Go to Part 3 -->>
Part 1 of this article discussed direct and hidden investment costs, the most heavily weighted factors [...])
- Vantagepoint 500 Stock Index mutual fund Class II Shares (VPSKX) rate a +9 Fund Authority Score (Here is some really good news for you. The Skilled Investor has published an article about lower cost S&P 500 index mutual funds that you can read, entitled: Low Cost S&P 500 Index Mutual Funds. The Standard & Poors 500 stock index is the most common equity index fund benchmark in the U.S. The S [...])