“He was an established family man with a stellar reputation and a lavish lifestyle to attest to his success,” reported the Wall Street Journal. “He had acquired most of his business from the glowing referrals of happy clients who had been promised investment returns of up to 15 percent tax-free. Small wonder some 1,300 investors, most of them elderly, poured more than $61 million into his deals.”
Every year, investors lose millions of dollars to bogus investment deals. These schemes, and the schemers who present these “incredible investment opportunities” to clients, usually display a similar pattern. As financial advisors, we need to be aware of what to look for when a client calls us about an unbelievable investment opportunity that promises they can earn 15% tax-free.
If your car needed repair, would you take it to a shop called “Honest Joe’s Car Repair”? Probably not. If Joe really were honest, he’d probably let the quality of his work speak for itself. A reputation for honesty is earned, not advertised. While honesty is a virtue an advisor must possess, trading on honesty, religion, club or organization membership is not, by itself, a reason to turn your life savings over to someone. It could, in fact, be a red flag. An honest member of your club or house of worship, without experience or training, is a poor substitute for an experienced professional financial advisor.
One afternoon, about two years ago, the mother of a long-time client called to tell me she was not going to go ahead with the recommendations I had made. I was a little surprised, because the recommendations I offered followed a thorough financial planning process. Although I was a little perplexed, I thought to myself, “Oh well, it’s not the first time a client didn’t go forward with my recommendation.”
Before hanging up the telephone, however, I asked her some questions to find out why. She made some disturbing revelations. She said she had talked to an advisor who promoted unreasonably high investment returns, and further, guaranteed that even if the investment went down in value he’d make up the loss out of his own pocket. “I trust him,” she told me. “He sings in our church choir.”
While being a person of faith may be a virtue, “it is not a reason to do business with someone,” I told her. “But the investment is guaranteed,” she protested. “He’ll make up any losses.” I told her it was against the law for an investment advisor to guarantee returns and promise to make up losses out of their own pocket. Anyway, I said, “Does he really have the capacity to make good on his guarantee?”
I asked her to do a little homework before she turned over a large sum of money to someone with no apparent credentials aside from singing in the church choir. “After all,” I said, “This is money you can’t afford to lose.” She reluctantly agreed to do the following:
- Call the National Association of Securities Dealers (NASD) to see if he holds a securities license and if the investment itself is registered. She could also find out if any complaints had been filed against him by other investors.
- Look in the business section of the newspaper to see if the investment was listed or advertised. Certainly not all investments listed or advertised in the newspaper are good ones. However, since government regulators read the same newspapers as we do, there’s a reasonable chance to believe the majority of them are legitimate.
- Check to see if he is a member of the National Association of Investment and Financial Advisors, the Financial Planning Association, Society of Financial Service Professionals, or any other recognized professional financial organization. Most legitimate advisors are members of at least one of these professional associations.
- Check to see if he has any professional designations, such as a CFP, an LUTCF, a ChFC, a CLU, or a CPA. Designations illustrate the owner has a level of competency and a commitment to continuing their education.
- Call the state securities department to see if the individual or the organization for which he or she works is registered as an investment advisor. It is against the law to give investment advice without being registered as such.
- Call the Better Business Bureau to see if any consumer complaints have been lodged against the advisor or the organization with which he’s affiliated.
Several weeks later, I called her. I was pleasantly surprised to find she had followed my advice. Her call to the NASD revealed he did not hold a securities license, and that his company was unregistered. She also looked in the business section of the newspaper and found no listing or advertisement of any investment promising high “guaranteed” returns.
She had also called her church friend, and discovered he held no professional designations and was not a member of any professional organizations. The state securities department was very interested to learn that he was an unregistered investment advisor. And, finally, her call to the Better Business Bureau revealed several consumer complaints against the company with which her friend was affiliated. As it turned out, my client’s friend was an unemployed welder who had, unwittingly, become mixed up with a scam artist who had targeted retirees at several churches to which he belonged.
While none of these actions are foolproof methods for evaluating investments or advisors, they can often be good indicators. The local and national media are loaded with horror stories about investment cons and their con artists. Headlines abound for stories like “Small Town Is Shaken By A Favorite Son’s Fraud” and “Pied Piper Charmed Retirees Into Investment Disaster.”
Years ago, I set up a file folder and titled it “Rogues Gallery.” As I read articles about bogus investments and scam artists, I’d clip the article and throw it in the file. Now about two inches thick, my files paint a graphic picture of a scam artist.
Here is the profile of a rogue:
- Family man/woman
- Stellar reputation
- Member of the prospect’s club or organization
- Friend or referral from a friend
- Very articulate
- Lavish lifestyle
- Meteoric rise to the top
Unfortunately, this profile looks more like that of a model citizen than of a con artist. What elements separate a legitimate professional financial advisor from a rogue? It usually boils down to just one: What is promised.
Rogues promise something that is not available to the general public. They promise high investment returns, guaranteed high investment returns, or tax-free guaranteed high investment returns.
Consumers who fall victim to rogues are both young and old. They are sophisticated and unsophisticated. They are people who give away their trust too quickly for the lure of making easy money. They trade good judgment for a promise that sounds too good to be true. And the promise is always too good to be true!
James P. Ruth, CFP, is a registered representative and president of Potomac Financial Group, a financial advisory practice in Gaithersburg, Md. He is a former Maryland state NAIFA president. He can be reached by phone at 301-948-3900 or by email at firstname.lastname@example.org.