I don’t know why I’m still a bit surprised every time I read about an advisor stealing from clients. I suppose it’s because I’m “in the business” and I can’t fathom anyone falling for the lines these advisors use. I forget that a smooth talking advisor can make just about any “investment opportunity” sound great and coupled with the abuse of trust they’ve established, the client is often beyond saving.
The reason why I write on this topic this month is I recently read where a Merrill Lynch advisor in Indiana overcharged clients to the tune of $2.5 million. He faces 25 years in prison and he has already agreed to pay $5 million to the SEC in fines. Sadly I read these stories many times a month. Sometimes it’s a small independent advisor and sometimes it’s someone from a large firm like Merrill or J.P. Morgan. One lesson here is that a large firm doesn’t shield the investor from bad actors.
Here are some things you can do (or suggest to family and friends) to protect yourself from unscrupulous players:
1. Ask who will provide custody of your money. A separate, third party is safest as this makes accessing your money more difficult than if the advisor provided their own custody.
2. Invest in “liquid investments” or listed investments – that is securities listed on an exchange. This means you like your money available to you on three days notice or less without a penalty. You still might have to pay a fee to sell (this would be quite modest) or to close your account. But stay away from “early withdrawal penalties, surrender charges”, and “non-listed securities”. There are some investments that are illiquid and are quite legitimate but they make more sense for ultra-high net worth and institutional investors.
3. Never let an advisor have trading discretion in your account when working on commission.
4. Never invest “alongside” your advisor, meaning in a deal with them. They should have some of their own money in the same investments they recommend to you but in a separate account and as I’ve described above. Never co-mingle your money with the advisor’s.
5. You should understand the investment strategy at a level. No one expects you to become an expert in a given strategy but you should be able to repeat it back to someone who asks how your money is invested.
6. If an advisor leads with the returns they claim they can deliver, they’re not an advisor, they are a salesperson. Markets generate returns, not advisors.
7. Always ask for a detailed list of fees you will be charged. Explicit and implicit. There are so many types of fees in a relationship and it can be complex. A good advisor has given this presentation many times and can do it succinctly and understandably.
8. Ask what planning services they offer. The best advisors understand that their true value is in planning, not picking investments or managers.
At the end of the day, common sense prevails when sniffing out those who would do you harm. If an advisor says something that sounds too good to be true, it probably is. And if they refuse to explain how your money is invested because it’s too complicated or because it would divulge their secret process, move on…fast.