News outlets have been filled with stories about investment frauds from the breathtaking to the mundane. In their rush to tell you about these frauds, rarely do our friends in the media take the time to tell you how to avoid these frauds. Learning how to avoid frauds is critical as those who don’t learn from history are doomed to repeat it.
Avoiding frauds should be awfully simple to do. No matter how well you might think you know someone, this is about the business of your money so it’s important to always ask a few very simple questions. The important thing is to ask ALL of them and if you don’t get a simple “yes” answer on any one, move on.
Here are the four questions you should ask:
(1) Is your firm registered as an investment adviser with the SEC? If yes, ask for the firm’s official name so you can look up Part I of the firm’s Form ADV on the SEC site http://www.sec.gov/investor/brokers.htm and check out the firm’s regulatory history. If the firm or any individual has regulatory problems in its past, move on. If the firm is not registered with the SEC as an investment adviser, move on.
(2) Will my investments be held by an independent custodian? Most reputable advisers do NOT take custody of their clients’ assets because of the regulatory requirements they should follow. Your adviser should use an independent bank or broker (think Schwab, Fidelity or TD Ameritrade) as the custodian for your assets. Your adviser should only be able to make trades in your account but should never be handling your money or investments directly. If the adviser wants custody of your money and investments, move on.
(3) Are you paid solely by me on the basis of assets you manage for me? If yes, the adviser is on your side of the desk – he/she owns earns more money only if you do. Any other form of compensation – commissions, payments from fund companies, incentive fees – creates of conflict of interest for the adviser which could be bad for you.
(4) Do you have a long history of managing money for clients? Look at the education and experience of the adviser’s principals that is disclosed in the Form ADV. Have they worked for reputable companies in the past? Do you they the appropriate education, experience and credentials to manage your money? If not, move on.
If you receive “yes” answers to these four questions, then you should feel comfortable in taking the next steps of evaluating the adviser’s services and fees. However, if any of the answers are “no”, you should continue your search for another adviser.