With the continued revelations that several financial advisors committed fraud and swindled clients out of substantial money, many people have expressed concerns about whom to trust with their personal investments. While it is valuable to seek the advice of a financial advisor or broker to handle your investments, it is also important for investors to know what they should do to help ensure that they do not become a fraud victim. The following is a list of eight items that all investors should be aware of when it comes to their personal accounts.
- Whether you are opening a new account or adding funds to an existing account, never make a check payable to your advisor or wire any money to the advisor/broker's individual account. The check should be made payable to an independent custodian for the benefit of yourself. For example, TD Ameritrade FBO ‘John and Jane Smith’.
- Periodically review the statements from the custodian to verify that the balances are the same as reported directly from your advisor/broker. If there are any discrepancies or there are items that you do not understand, speak with your advisor right away.
- There is no free lunch. Unless all of your money is in cash, expect some down periods: months, quarters and depending on the risks you have taken, even years. The more money that you have invested in stocks, the more likely your portfolio will have times that the portfolio will temporary decline. If a broker/advisor is telling you they have found a way to provide stock market returns without the volatility of negative time periods, they are lying. This Holy Grail of Investing does not exist. Risk and Return are related.
- Yields indicate risks. Thus, for cash reserve accounts and bond accounts, it is generally not always worth the risk to achieve the higher yield. An important exception is a bank account or a CD that is covered by FDIC insurance. Always ask if an investment is covered by FDIC insurance, and to what limit.
- Be realistic. Your portfolio should achieve a return in proportion to the risks that you have taken. You will not receive substantial returns unless you take substantial risks. You need to spend the time necessary to determine the amount of risk that you need and are able to withstand in order to reach your individual goals.
- Your broker does not have the ability to predict the future of a stock or sector with certainty especially over a short-term frame of less than five years. Use diversification to spread your investment "eggs" to many baskets.
- No advisor or broker is so smart that he or she has devised a special strategy that needs to be kept hidden in order to achieve the high rates of return. If the advisor cannot explain the investment strategy to you so that you can understand it, find another advisor.
- Lastly, even if the advisor/broker has been recommended by your best friend or family member, do not just assume that the advisor can be trusted. You still need to take these steps to protect yourself from those who are prying on your assets. It is essential to live by the Ronald Reagan adage of "Trust, but verify."
These might seem like basic points, but I would imagine that many investment fraud victims who have been in the news wish they had paid attention to one or more of them. Keep in mind that although you may seek the advice of an advisor when it comes to your investments, ultimately you are responsible for your own financial future and it will pay to have a better understanding of what you can do to verify the safety of your portfolio.