Back off, Bernie

One of the byproducts of the financial crisis is that folks are taking a closer look at their own personal finances and have developed a healthy sense of skepticism about the financial industry.  They want to understand better what they have and how their investments work.  Knowledge is power, and even if you have someone managing your investments for you, a basic knowledge and understanding of your finances gives you an advantage.  Here are some tips.

First and foremost—it’s your money!

Not being good with investments or disliking finance is no excuse.  Never completely outsource the management of your money and investments to someone else.  You may be a do-it-yourselfer who just wants a little direction or someone who wants to delegate the paperwork and details that go with your investments, but not being involved at all is a mistake.

Ask questions.  Understand your investments; why you have them, what type they are, and what kind of expenses they carry so you can make educated choices.  Good communication between you and your advisor is crucial; it leaves less room for misunderstanding of your wishes and intentions.  The victims in the Bernie Madoff scandal were discouraged from asking questions and hesitated to rock the boat.  A good advisor will welcome your questions and appreciate the opportunity to educate you.

Open every statement and trade confirmation.  Every one.  If you don’t understand what the transactions are, ask.  Dishonest advisors count on those statements going unopened so you won’t notice if they make excessive trades or worse, direct funds to themselves.  Know what your account’s trading policy is- does your advisor have discretionary authority?  That means he or she is authorized to make trades in your account without consulting you first.  Non-discretionary on the other hand, means that all trades must be discussed with you and agreed to.  This is an important distinction and investors are often not aware of the terms of their agreement until they suspect abuse.

Make sure your money is being held by a third party custodian, not by your advisor. Checks for investment contributions should always be payable to the custodian.  Seems basic, but Madoff’s investors were giving him the money personally.  The custodian will hold the funds and prevent them from being released to anyone but you at your address of record without your written consent.  You should receive statements from that custodian regularly.  It’s okay for the advisor to create reports too, but the custodian’s statements then provide independent verification.  The custodian should also be audited regularly by a reputable, independent firm.

If it sounds too good to be true… well then it probably is.  There’s always a trade-off, whether in the form of increased risk, decreased liquidity, or fees.  The creators of financial products are in the business to make money, not to be charitable to you.

Take your time with new investments.  Don’t let anyone rush you; investing is not to be taken lightly and you should understand what you are buying.  Every day there is a new “once in a lifetime” opportunity to take advantage of.  If you’re not ready for today’s, wait for tomorrow’s.  High pressure sales tactics have no place in this business.

Ask about the risks.  Every investment has risks, even stuffing the mattress.  Find out what they are and determine with your advisor how and if they fit into your overall strategy.

Know who your advisor works for and how he or she gets paid.  The financial services industry traditionally has been very opaque about compensation, and often people think they are getting advice for free.  Unless you’re working with a volunteer organization, you are paying for your advice somehow.  Advisors can be paid by commissions, fees, or a combination.  They are all viable options, but you should know what and how you are paying, and your advisor should be able to spell it out for you.  Commissioned advisors are paid based on the products sold; insurance, annuities, mutual funds, or alternative investments for example. Fee based planners may charge based on a percentage of assets they manage (and sometimes also receive commissions on product).  Fee only planners may work on a percentage of assets, flat fee or hourly fee, with no commissions or sales charges.

Don’t be afraid to ask for a second opinion.  If you have misgivings, or just want to be sure you’re on the right track, check with another reputable advisor.  Always research any advisor you are considering working with, be sure to interview more than one, and check registrations as well as complaints and disciplinary actions.  Visit for links to the appropriate regulatory agencies and interview questions.  You can also inquire of your state’s securities commission for more information on an advisor.

photo by: Images_of_Money

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Part 2A & B of Form ADV: Firm Brochure