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Advice & More May 2015

Dollar Sense

Anyone Can Pose as a Financial Planner: No Experience Necessary

By Teresa Ambord

To become certified, an individual has to not just be tested, but commit to continuing education in both finance and ethics. Of course, ethics can’t really be taught to a person with thievery in his or her heart. Bernard Madoff was long on credentials and woefully short on ethics, defrauding a long list of victims which included his own family members.

Have you seen the TV commercial where a disc jockey pretends to be a financial adviser? He’s clean-cut and dressed in a nice business suit. Seated in a well-appointed office, he says all the right things to three potential clients. “Let me talk to you about retirement. A 401(k) is the most sound way to go, now let’s talk about asset allocation. Sounds good. Sounds knowledgeable.

Then he asks, “Would you trust me as your financial planner?” “I would, indeed,” says the client. That’s when the imposter stands up and starts dancing. He says, “Well, that’s funny. Because actually… I’m a DJ! I have no financial experience at all!” The clients are shocked as they are shown a video of his transformation from a long-haired, free-wheeling disc jockey, to the poser who stands before them in a business suit, asking them to trust him with their savings.

“Is that really you?” they ask.

The ad is brilliant. It illustrates perfectly a huge problem. That is, anyone can hang up a shingle claiming to be a financial expert. Too often, members of the public accept a professional appearance, the right jargon, and a business office as evidence that the person behind the desk is qualified to manage their money. That would be a mistake. The list of fakes is only exceeded by the trail of tears and lost fortunes. That’s why cfp.org made the commercial.

 

Certified Financial Planners

An actual certified financial planner (CFP) undergoes rigorous testing administered by the Certified Financial Planner Board of Standards. To become certified, an individual has to not just be tested, but commit to continuing education in both finance and ethics. Of course, ethics can’t really be taught to a person with thievery in his or her heart. Bernard Madoff was long on credentials and woefully short on ethics, defrauding a long list of victims which included his own family members. If you’d been duped by a fraudulent CFP, you’re actually in good company. Madoff’s victim list included some well-heeled, well-educated individuals, like Steven Spielberg and Larry King.

 

What Should You Look For?

A recent article in the Wall Street Journal (WSJ) has some advice. Before you trust anyone with your money, WSJ recommends you get answers to these questions:

  • Have you been convicted of a crime?
  • Has any regulatory body or investment industry group put you under investigation, even if you were not found guilty or responsible?
  • Ask for references from current clients with similar finances and goals to yours.

The Financial Industry Regulatory Authority (FINRA ) also advises you to ask “Are you licensed to sell me this investment?” If they say yes, check it out for yourself online, at FINRA (brokercheck.finra.org). You can also check an adviser with the Securities and Exchange Commission (adviserinfo.sec.gov) and then click on “investment adviser search.” If the adviser claims to be a certified financial planner, you can go to cfp.net and click on “find a CFP professional.” You’ll have the chance to type in your zip code. I did this and found records of local advisers and notations about discipline records.

WSJ also suggest you steer clear of money managers who work on commission. “These advisors may not be the most unbiased source of advice if they profit from steering you into particular products.” Better to opt for a planner who is paid:

  • An hourly fee
  • An annual fee
  • A percentage of the assets he or she manages for you
  • Or a flat fee

For people who don’t have a great deal of assets, WSJ suggests an hourly payment might be the best fit, as they cater to people with simple needs. In addition, these planners may be building a business and relying on your good recommendation to get new clients.

A couple of more points, regardless of how good the interest rate is or appears to be –  don’t put too large an investment into one fund. Remember the Enron debacle? A key reason so many people lost their life savings is that they put all their money into Enron stock, rather than diversifying. If ever there was a time for that old admonition “don’t put all your eggs in one basket,” this was it.

 

Have You Heard of Affinity Fraud?

That’s when the scam artist uses your faith or a shared church affiliation to get you to invest in what turns out to be a fraud. It’s also called faith-based fraud, although it might involve a charity instead of a church. Sadly the lineup of affinity fraud stories never ends. Here are some examples that were detailed on CNBC’s “American Greed.”

Bobby Thompson raised millions for an organization that claimed to help Navy veterans. Of course the donations were made because of love and respect for our nation’s military. He became a big shot in Washington DC, a friend of many highly placed political leaders. But the charity he claimed to represent didn’t exist.

Another affinity fraud was perpetrated by a Washington DC insider who claimed to be building homes for desperate people in Haiti. He fed off the generosity of people who thought they were doing good. He too, counted many big political names and some celebrities among his supporters.

Other affinity frauds arise from inside a church, when a bad apple manages to win the confidence of fellow church members by claiming to hold the same values. After doing time in prison for financial fraud, Barry Minkow turned his life around, he said. Minkow even became a minister and led a church in San Diego, California. He also formed a company, Fraud Discovery Institute, which he used to help the public avoid investing in scams, and assisted the FBI uncover financial criminals.

But fraud fighting wasn’t as lucrative as fraud itself. Minkow and accomplices would also target certain businesses and publicly accuse them of fraud, then extort money from them. It was easy, because as a minister and a now-respected fraud fighter, people believed him when he cried “fraud!” But Minkow met his match when he pointed the finger of blame at homebuilders, Lennar Corporation.

He did succeed in making Lennar’s stock prices plummet by accusing them of fraud. But when Lennar executives met with him and proved their innocence, he offered to drop his campaign against them, if they gave him $2 million. Lennar held firm and Minkow went to prison. After his arrest, the church that trusted him for years took a closer look at the finances. That’s when they learned he had also defrauded them, to the tune of $3.5 million.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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