Beware of Pretenders, Predators and Other Red Flags, Part 2

Gold Family Wealth
Sep 27 · 5 min read

How to spot a predatory advisor from a mile away

By Michael R Gold CFP®, MBAKey Takeaways

  • I believe there are three telltale signs for spotting a predatory advisor.
  • Roughly one in five business owners (20%) believe they have been hoodwinked by a financial advisor*.
  • Always make sure you know who is holding your money-and whether or not they’re investing it directly on your behalf.

In Part 1 of this post, I shared secrets for sniffing out the Pretenders-well intentioned, but incompetent advisors who have their sights set on winning your business. Here, I’ll help you sniff out the predatory advisors who intentionally want to separate you and your family from your hard-earned wealth.

Predators

Predators are advisors who are intent on financially exploiting people with whom they come in contact. They know exactly what they are doing. These types of advisors seek to manipulate, abuse and otherwise take advantage of wealthy people and their families. What makes it worse is that many times victims don’t realize they’ve been taken advantage of by a predatory advisor until it’s too late.

In the “post-Bernie Madoff world”, it’s no surprise that affluent people more than ever are concerned about being taken advantage of by the financial professionals they work with.

According to a 2011 Marquet International Report, the SEC is investigating hundreds of Ponzi schemes and other cases of financial fraud at any given time. Ponzi schemes generally surface during market crashes like the 2008–2009 financial crisis. As Warren Buffett said in a 2001 shareholder letter, “When the tide goes out, you see who’s been swimming naked.”

Red flags: How to spot a Predator

Here are three telltale signs for spotting predatory advisors:

1. When something is too good to be true, it probably is.

For instance:

  • The advisor promises investment returns that are substantially better than anything else available.
  • They boast a long-term investment performance track record that never underperformed. The likelihood is that, over time, even the best investment professionals will have periods when they underperform.
  • They claim to have proprietary strategies guaranteed to lower your taxes dramatically. While there are certainly ways to lower your taxes significantly, none of them are proprietary.

2. Questionable custody

Ask who will hold custody of your money. Your funds should be held by independent custodians. Significant client damage could have been averted had Madoff been required to maintain an independent custodian. An SEC inspection would have looked at the Madoff client’s independent custodian accounts and would have seen that the funds in the account statements Madoff provided and the Ponzi scheme would have been uncovered early on.

Don’t be afraid to ask: “Who has custody over my money?” If you are writing checks directly to your advisor’s name (or firm’s name), this could be a red flag. Usually you should be writing checks to a third-party custodian such as Charles Schwab, Pershing or Fidelity. By contrast, Madoff’s clients simply wrote checks to “Madoff Investments.” Be careful here. Even if you verify that your advisor doesn’t have custody of your assets, you are not out of the woods. Make sure your advisor doesn’t take your money and simply hand it over to hedge funds or to other third party investors that will take custody of your money. Many of Madoff’s victims did not hire him directly to be their advisor. Instead, they paid their own advisors who then used feeder funds without their knowledge. Those feeder funds then redirected money to Madoff Investments as a third party money manager. Ouch!

3. Philosophy

I believe that if the advisor meets all the above criteria, yet is focused on market timing and trading strategies, or brings up past performance as the primary reason to invest with him or her, then I believe you should end the conversation at once and continue your search. I believe you should want a true wealth manager who will view your situation from a holistic standpoint. You want an advisor who will build you a roadmap focusing on investment and advanced planning strategies that are both cost- and tax-efficient. You want an advisor who follows a disciplined repeatable process that circumvents behavioral blunders.

Conclusion

Keep these red flags in mind as you move on to the next chapter in your financial life. Finding the right advisor for your current stage in life will keep the pretenders and predators at bay, and it will help you put your hard earned wealth to work as efficiently as possible for yourself, your family and the causes you support.Contact me any time if you would like to discuss these topics in more detail.

Want to ensure you don’t have any gaps or missed opportunities in your wealth planning? Click here to “Stress-Test” your current plan FREE.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Gold Family Wealth, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Gold Family Wealth, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Gold Family Wealth, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Gold Family Wealth, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are an Gold Family Wealth, LLC client, please remember to contact Gold Family Wealth, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services.


Originally published at https://www.linkedin.com.

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