Q. I have a concern about financial advisors and their role in providing retirement planning services. Many older people are being preyed upon by these advisors. I think the subject needs to be brought out into the open. Can you address this? R.S.
Financial security is key at any life stage. It becomes even more important in later life since there is less time to recover from financial hiccups compared to one’s younger years.
Your concern is shared by federal and state regulators. Both recently issued warnings on the increase in the number of financial advisors who are cheating their clients. These unethical folks often create fake websites using the names of real advisors to get your personal data as well as your money. FINRA, the self-regulators of the brokerage industry, warned investors to look for red flags when noting “poor grammar, misspellings, odd or awkward phrasing or misuse of investor terminology,” as reported in Barron’s.
Most financial advisors are honest, skilled and ethical, although occasionally we have someone such as Bernie Madoff who at one time was a highly regarded financial advisor. Madoff exposed the dark side of the profession by becoming a Ponzi-scheme swindler. His clients were smart, sophisticated and most often wealthy. The fact that the wealthy elite could fall for such a scam suggests that us ordinary folks might even be more vulnerable.
The following schemes should place us on high alert: The popular Ponzi scheme is the payment of financial returns to current investors from money deposited by new investors; as these financial transactions occur, the advisor is siphoning off some of the money. Another is affinity fraud, which targets a specific group such as a religious group or a group of best friends who convince one another the investment is a good one.
Unethical advisors can misrepresent their qualifications and claim to have experience they do not have; they may promise or even guarantee higher than market return for your investment. There is a saying, “If it is too good to be true, it probably is.”
Then there is the churning scheme. Stockbrokers have been charged with this. They typically are paid when buying and selling stock. This payment may incentivize them to place their needs before their client, making unnecessary stock trades for their own financial gain. Again: most stockbrokers are ethical and work for the client.
It’s easy to be confused by titles since there is no federal regulation on titles used by financial professionals. Here is some distinction. Financial planners typically take a long-range and holistic view with clients; advisors often take a shorter or more narrow view. To add to the confusion, a financial professional can be both an advisor and planner. Then there is the financial manager who manages your investments and makes decisions with your approval according to your retirement goals. The latter usually sets up regular reviews and meetings to review your portfolio. All three can work towards financial retirement goals with periodic meetings.
To learn more about a financial advisor, planner or manager, consider asking some of the following questions suggested by the Edward Jones website:
- What do you like about your job? You want someone who does more than punch a time clock.
- What services do you provide? Discuss whether they specialize in developing long-term strategies, balancing your portfolio, developing a favorable tax strategy and more.
- What are your qualifications? Here are just a few that might be mentioned: Chartered Financial Consultant, a Retirement Income Certified Professional and a Certified Financial Planner. All require coursework and exams. Check the Internet for more information about these designations and others.
- How will you be compensated? Ask if compensation will be hourly, per transaction or a percentage of your portfolio.
- What happens if you are no longer in your position? Ask who will be responsible for your financial affairs if your financial professional leaves the position?
Also, consider speaking with friends and family members about their experience and ask for recommendations.
Thank you, R.S., for drawing our attention to potential financial scams. By being informed financial consumers, we are in a better position to establish financial relationships with professionals who are informed, ethical and committed to our financial priorities. Fortunately, most are just that.
Be well, stay safe and kind to yourself and others.
