Protecting Your Parents: Keep the Sharks at Bay

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Avoid Investment Fraud

I’ve heard that only 7% of the financial services world are fee-only fiduciaries. The other 93% are mostly commissioned based agents and brokers whose disclosures show – if you bother to read them – that their interests are not aligned with yours.

For many NAPFA members the bright line between fee-only fiduciaries and the so called fee-based world that lives off of sales and commissions is as clear as the dark and light sides of the force in Star Wars. Of course that isn’t true. Many commission-based agents are working to do what is in the best interest of their clients within the framework of their companies because they are decent and honest people.

Nevertheless, the rules based system is predicated on the product being roughly suitable and the consumer being agreeable and cognizant enough to understand the structure of the product, the disclosures and the fees. As we age, all of us become more susceptible to agreeing with something when it sounds good or being paranoid for no reason. Both tenancies can be financial devastating or debilitating for the elderly, and we need trusted fiduciaries to help protect us from predators.

I’ve been reading as much as I can about protecting seniors from being vulnerable to financial abuse so it was with interest that I read Lisa Gibbs’ article, “Keep the Sharks at Bay” in Money Magazine.

The article suggests a risk meter for avoiding investment fraud at saveandinvest.com. I took the survey and scored 25 out of 100 for risk, which is on the low end of the spectrum. There were three questions that caused me to score 25:

I consider hiring investment professional recommend to me. But I vet them and understand exactly how they are paid, and if they are primarily sales people I take their financial advice with a grain of salt. I read my mail and talk with sales people who call. I consider it part of my job to be aware of the free lunches and gimmicks used by my competition. I prefer riskier investments. It is part of my job to look for returns, especially in countries with high economic freedom or emerging markets.

The remainder of the questions seemed like they were good advice for avoiding fraud and the risk survey ends with a list of specific suggestions for implementation.

Perhaps the most important principle is that everyone needs (1) At least one family member that they are completely open about with their finances and their financial plan. That can be a spouse only so long as your spouse is able to keep up with understanding everything. and (2) At least one financial services professional who will sit on their side of the table and say, “No, that is a bad idea.”

For some clients, the first time we say, “No, that is a bad idea.” we have earned our fee for life.

With a family member and a fiduciary advisor, clients should learn to always respond, “I never do anything without the recommendation of my personal financial advisor.”

Some clients want to know exactly why something is a bad idea. Often, there is enough information in the disclosures to show them the fees that are too high or the returns which may or may not materialize. But with a really good scam, they are just lying, and there is nothing to analyze other than that it breaks one of our ten rules for safeguarding your money.

In that case the answer is just, “It is too good to be true.

One benefit of a fee-only fiduciary NAPFA member is that you can ensure that there are none of the conflicts of interest associated with getting paid for selling products. NAPFA members take the following fiduciary oath:

The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client.

The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest, which will or reasonably may compromise the impartiality or independence of the advisor.

The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client’s purchase or sale of a financial product.

The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client’s business.

Following the NAPFA Fiduciary Oath means I shall:

  • Always act in good faith and with candor.
  • Be proactive in disclosing any conflicts of interest that may impact a client.
  • Not accept any referral fees or compensation contingent upon the purchase or sale of a financial product.

Signed this _____ of ________________

________________________________

NAPFA-Registered Financial Advisor

Make sure that you or your parents have a fiduciary advisor by searching at NAPFA.org today.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)