Trust and Investment Professionals: Avoid the Ponzi Trap

By Jeremy Sorci | February 14, 2017

Given the high-profile financial debacles of the past decade, from Bernard Madoff's global Ponzi scheme to the Lehman Brothers collapse, it's no surprise that many investors are wary of entrusting just any investment professional with their hard-earned money. 

Jeremy Sorci is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyBut with all of the investment firms out there, thoroughly vetting potential wealth advisors and choosing the right one can seem like an overwhelming task. This, in turn, may lead some investors to be just a bit too trusting about who they work with. But simply worrying about whether or not your financial planner is the next Madoff-in-sheep's-clothing isn't the answer.

The solution lies in educating yourself so that you can choose a talented, trustworthy wealth advisor with the skill-set, education, training and experience that you need -- and avoid being the victim of fraud.

Here's how.

Is Your Investment Professional Legit?

When you're on the search for a wealth advisor, you have to perform your due diligence. It's not common knowledge, but almost anyone can call themselves a financial planner or financial advisor, regardless of their education, experience, training and qualifications -- or lack thereof. Just as you wouldn't ever choose a doctor, attorney or accountant without checking their references, neither should you choose an advisor without doing a bit of background research. 

Fortunately, a number of national organizations issue credentials to financial professionals, and may offer free lists of accredited professionals and members on their websites. These include: 

Background Checks for Potential Financial Planning Consultants

Now it's time to dig a little deeper. You want to know how much experience a potential advisor has, and how long she's been in the business. The easiest way to check on this is by taking a look at her ADV form, part III; legit advisors file these with the U.S. Securities and Exchange Commission or SEC. ADV forms contain information such as the advisor's background, the services she offers, and the fees she charges. 

You can also check for any complaints filed against an advisor, as well as any disciplinary actions taken in the past. Look up the potential advisor on the SEC's Investment Advisor Public Disclosure website. The Certified Financial Planning Board also offers an online background check feature. You can also check with your state's North American Securities Administrators Association regulator.

Jeremy Sorci is a CFP Certified Financial Planner and Financial Advisor with Premier Financial Group in Eureka Humboldt CountyFinancial Planning Strategies: What's the Difference Between Manager and Custodian? 

Educate yourself about the duties of a manager and those of a custodian, because there's a big difference between the two. A custodian takes possession of your accounts and issues statements of transactions, while a manager actually executes those transactions. When a single advisor is playing both roles, that could open the door for fraud.

If financial planner wants you to cede control of your account over to him -- and make out checks to him -- take that as a red flag. Instead, you want your accounts in the custody of an investment firm that's regulated by the Financial Industry Regulatory Authority or FINRA and backed up by the Securities Investor Protection Corporation. Plus, ensure that you'll receive at least quarterly statements from your accounts' custodian, not just from the advisor.

Similarly, if a potential advisor asks that you grant her discretionary trading authority, think twice before retaining her services. Discretionary authority allows an advisor to buy and sell securities without your permission. 

How Does a Wealth Advisor Set Fees?

A potential advisor's compensation structure is important for reasons above and beyond the cost impact. Fee structure actually influences the financial advice you receive. Common fee structures include: 

  • Commission only: Investment professionals are paid based on which financial products they sell; this structure can create a potential for conflicts of interest
  • Fee only: Advisors are compensated through a set fee, an hourly rate or a percentage of assets under management or AUM; this compensation structure can help to mitigate conflict of interest concerns
  • Combination of commissions and fees
  • Fee offset: Advisors are paid a flat fee with commissions offset; ask who receives the excess if the commission is higher than the fee

A trustworthy  advisor will always provide you with a clear, written explanation of how their fee structure works. If a potential financial advisor isn't willing to make this disclosure, take that as a warning sign.

Asset Management Firms: Are They Transparent?

Educate yourself as to the nature of the investments a potential advisor recommends. If a suggested asset class is obscure or exotic, that doesn't necessarily mean it's sketchy, but you'd better make an effort to understand how, exactly, it generates returns before you jump in. 

If an asset isn't transparent, such as hedge funds that aren't required to disclose their holdings, take caution. Transparent assets include stocks, bonds, exchange traded funds or ETFs, and mutual funds. And if an advisor downplays risk? That's another huge red flag.

Is Your Retirement Planning Advisor on the Up-and-Up?

If you're nearing retirement, tread cautiously. Unscrupulous investment professionals often target retirement-stage investors. One common trick: Suggesting that the investor liquidate their securities and purchase variable or indexed annuities, instead.

What's Your Investment Professional's Educational and Professional Background?

Jeremy Sorci is a CFP Certified Financial Planner and Financial Advisor with Premier Financial Group in Eureka Humboldt CountyAs we stated earlier, anyone can call themselves a financial planner; they don't even need a college degree -- or a high school diploma! Wouldn't you feel more comfortable taking financial advice from someone with a rigorous educational background, extensive training, and relevant expertise? 

We recommend retaining an advisor with, at minimum, an undergraduate degree in a relevant field, as well as an advisor who's earned credentials such as:


  • Chartered Financial Consultant or (ChFC®)

  • Certified Public Accountant/Personal Financial Specialist or (CPA/PFS)

  • Financial Planning Association Member

  • Accredited Investment Fiduciary (AIF®)

  • Certified Investment Management Analyst (CIMA®)

  • Accredited Fiduciary Investment Manager (AFIM®)

And speaking of fiduciaries, we recommend working with a wealth advisor who is willing to put their fiduciary obligation in writing. Fiduciaries are bound to place their clients' financial interests above their own, so they can't work on commission. They're also bound to full disclosure of any conflicts of interest and must always act in good faith. Educating yourself is the best defense against financial fraud, so take the time to do it right.  

Posted in Financial Planning