When it comes to investing, investors are forced to trust someone early on in the process. After all, investing is complicated and you have to rely on the recommendations of an advisor. The key to being successful with that process is avoiding getting ripped off with your investments.
The worst case scenario is getting involved with a Fraudster. This is someone whose main mission is to literally steal your money. The most famous scam involved the massive case of fraud with Bernie Madoff. He stole billions of dollars from trusting investors over a very long-time. These investors had no clue what was happening. How would you know?
There are three red flags. First, you want to know who is involved with your money. An advisor has a broker dealer, a clearing house, and then the company the advisor is associated with. All of these entities play a different role. The broker dealer makes sure that the process stays within compliance. The clearing house handles the money. The firm is there to oversee the process and advise the client. There are degrees of separation that exist to protect your money.
With Bernie Madoff, there were no degrees of separation because he owned all three. Thus writing a check to his broker dealer was like putting a check in Bernie’s bank account that he had full control over to do with as he pleased. He was also regulating himself. That was an unusual case. However, it is important to be aware of this level of protection.
Second, never write a check directly to an advisor’s firm. That is how the majority of these scams occur. You give the advisor full control over the money.
Third, beware of the too good to be true investment. The CD that is paying 5% while other ones are paying 1%. The investment that never loses money. The “can’t miss” investment with no risk. You get the idea.
The Commission Focused Salesperson
This rip-off might be just as bad as the fraudster. They are there to sell investment product. As a result of that focus, they are putting their interest in front of you. That rarely ends well. The truth is that financial companies have two different types of products – the product that is benefit rich for the advisor and the product that is benefit rich for the client. This creates a huge conflict of interest. Regulators are in the process of changing the standards in which advisors operate for that very reason.
If you get in the room with an overly aggressive salesperson, run for the door and don’t look back. They are very easy to spot. Aggressive sales tactics are not necessary if the advisor is putting the client first.
In a world focused on making money using any means necessary, it is important to be aware, you’re your eyes wide open, and don’t trust to early.