SEC Advertises to Protect Against Fraud

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In March and May 2017, the Securities and Exchange Commission Office of Investor Education and Advocacy released two sponsored Facebook videos advertising the use of

The first video features a suited man who one minute is cracking a bottle labeled “Jennifer Smith’s Annual Bonus” on the front of his new boat and the next minute is calmly suggesting, “You need to buy today, Jennifer. Trust me.”

The second video shows a mansion’s gates labeled “RJ Kline’s 401K,” a wine bottle labeled “Karen Samson’s Annual Bonus,” and a boat labeled “Jose Diaz’s Life Savings” all enjoyed by rambunctious gangs of lavish individuals. Then, a suited man says, “I can guarantee it at least doubles. I’ve got big plans for your money.” to a nervous couple in his office.

Both end by saying, “Don’t let someone else live the life you’re saving for. Find out if you’re dealing with a registered investment professional at Investor.Gov. Before You Invest,”

I like these videos a lot. The message that investment advisors may just be wolves in sheep’s clothing is a message that we say a lot in our articles. The hidden fees of commission-based firms are steep and even 0.176% in higher fees could mean having to work an entire extra year before you can retire.

Sadly though, won’t protect you. Many registered investment professionals do have exorbitant fees which fund their lavish lifestyles. On, you will find people who, although registered, are still ripping you off.

In “Morgan Stanley Is A Terrible Choice,” David Marotta reports how big broker-dealer firm Morgan Stanley in order to appear as though they are removing conflicts of interest actually just removed the low-cost option (arguably the option in the best interest of the client) from its offered funds so that broker-dealers have to place clients in other high-cost funds. Despite this shady behavior, try searching for Morgan Stanley at Investor.Gov; all 31 branches are registered and ready to charge you these high fees and commissions.

Bob Veres in a Financial Planning Magazine article entitled “Give Up the ‘Fiduciary’ Fight ” reports that the SEC and Congress are so influenced by commission-based agents and brokers that they can’t be trusted to do the right thing for the consumer. He writes, “In my view, the fiduciary battle should be abandoned as a lost cause,” and I agree with him. Government regulations don’t make us safer especially in the financial industry because you cannot create a list of rules that definitively identify what it means to be a fiduciary.

The fiduciary standard is like the golden rule: do unto others as you would have others do unto you. We cannot define a set of golden-rule-approved behavior and a set of golden-rule-rejected behavior. Each situation calls for a slightly different response and the high moral principle of the standard must guide you.

“Don’t push your sister,” may work in 99% of cases as an interpretation of the golden rule, but when the TV is falling on your sister, the golden rule would have you push her out of the way. In this manner, you can see how a principle-based standard creates better behavior than a rules-based set of regulations.

A fiduciary is “an individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.” A fiduciary has a legal obligation to act in a client’s best interests.

There are many fiduciaries in the financial world not just among professionals. Each trustee or board member has a fiduciary duty to their trust or endowment. Employers offering retirement plans have a fiduciary responsibility to their plan participants. And ideally all registered investment professionals would be held to this standard, but that is sadly not the case. For many years there existed the “Merrill Lynch rule” that allowed stockbrokers to be able to offer the same services as financial planners without being accountable to the fiduciary standards. That was rightly overturned by the courts in March of 2017 but the SEC filed a 120-day stay in May to give broker dealers to convert customers to a different but probably equally expensive compensation arrangement.

David Marotta describes this in “Fiduciary Fight Part 1: The Fight Over The Fiduciary Label“:

A commission-based agent or broker has no such legal obligation and while they are allowed to pose as a financial advisor, they are in reality a salesman. Their legal standard is called suitability meaning that what they sell a client has to be vaguely suitable for the client to purchase. They are legally safe so long as they follow the letter of the law regarding signatures and disclosures, none of which clients pay any attention to. The only example I have ever heard of regarding an unsuitable investment is selling 30-year bonds to a 99 year-old client. It certainly doesn’t stop them from selling people variable annuities.

The financial industry is not safe. You need to protect yourself. We created two companion strategies to protecting yourself.

First, we created “Ten Questions to Ask a Financial Advisor” so that you can interview advisors and easily screen them. Although answering affirmatively to all 10 questions would be a first screen in selecting a financial advisor, it still does not guarantee the person has the competence necessary to offer comprehensive wealth management. Answering negatively to any of these questions is a red flag though.

Second, we created the eight principles to safeguard your money which you should use regardless of your advisor’s 10-Question score. If you had used the principles in the Safeguarding Your Money Series with this SEC video so-called advisor, you would have known that the fraudster was indeed a fraud and managed to keep your money in your pockets rather than his. Here are the relevant principles:

Right in the video, you see the nervous couple handing their check directly to the fraudster for supposed deposit. If you deposit money by writing checks to your so-called advisor or his so-called financial planning firm, run. You want to work with an advisor that uses a reputable, qualified third-party custodian. Also, you want your advisor to be limited in what he or she can do with your money.

If these clients assets were custodied at a third-party custodian with the appropriate limitations on the advisor, then the fraudster would not have been able to access their savings and spend it on himself.

Safeguard #1: Do Not Allow Your Advisor to Have Custody of Your Investments
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I was recently asked if investors should trust their financial advisors. And my short answer, you may be surprised to hear, was no. Your financial advisor should not also have custody of your investments.

“I can guarantee it at least doubles,” is too good to be true, and it sugarcoats reality. You need the truth. You can handle the truth, and without it, you certainly can’t make realistic financial plans.

No investment is risk free. Even relatively stable investments can lose money. Bonds can default or have their credit rating reduced, cash can lose its purchasing power due to inflation, and even the money market can “break the dollar” and return less than you invested. The equity markets are even more inherently volatile. Investing in securities involves a risk of loss that clients should be prepared to weather.

No firm, ours included, can represent, guarantee, or imply that their services or methods of analysis can or will predict future results, successfully identify market tops or bottoms, or insulate you from losses due to market corrections or crashes. No guarantees can be offered that your goals or objectives will be achieved. Furthermore, no promises or assumptions can be made that the advisory services offered by a particular firm will provide a return superior to alternative investment strategies.

Safeguard #2: Walk Away from “Too Good to Be True”
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There are several investment safeguards you should insist on. One is to avoid any investment opportunity that sounds too good to be true.

“Trust me” and “I’ve got big plans” are not an investment strategies. If you don’t understand how the strategy works, it isn’t safe. Your advisor should be able to explain to you how his strategy works in a way you could repeat it.

Safeguard #5: Understand Your Investment Strategy
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You have a critical part to play in financial planning. Certain responsibilities cannot be delegated to others.

This fraudster drives a sports car, lives in a mansion, owns a boat, and seems to have no frugality in him. Wealth is what you save, not what you spend. That’s why an ostentatious and excessive lifestyle is a red flag for an investment advisor. It’s common sense: if an advisor is not conservative in where he invests his own money, how conservative is he likely to be with your money?

Safeguard #8: Avoid an Advisor with a Lavish Lifestyle
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There will always be swindlers masquerading as investment advisors. You can learn to recognize such people by their over-the-top lifestyle.

Here are the other principles in the Safeguarding Your Money Series:

Safeguard #3: Insist on Publicly Priced and Traded Investments
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One important safeguard is to insist on investing only in liquid assets. Investors undervalue liquidity 99.9% of the time. You need to be in the other 0.1%.

Safeguard #4: Buy Investments That Trend Upward
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Crazy volatile markets push people toward irrational investment schemes. Know how to avoid them in order to safeguard your money.

Safeguard #6: Recognize And Avoid Financial Hooks
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To safeguard your money, you must be able to extricate yourself from any bad investment quickly. Of course, the companies that sell mistakes don’t want you to be able to do that, so they use financial hooks to hold your money captive.

Given all the greed and deceit in the world of financial services, you shouldn’t have to trust your financial advisor. You should have safeguards in place to prevent even the sweetest professional from stepping out of line.

I like the SEC video for reminding us of this fact, but Investor.Gov will not protect you. You need to protect yourself by selecting a fee-only fiduciary and safeguarding your money.

Images in this blog post are screenshots from the mentioned videos.

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.

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