10 Ways to Spot Financial Hucksters

When I ponder investment topics to write about, my inspiration comes in many forms. Today, I have Paul Manafort to thank.

Let’s take a break from market gyrations to focus on the financial crime wave that could hurt individual investors just like you.

Paul Manafort, political lobbyist and Donald Trump’s former campaign manager, stands accused by federal prosecutors of a mind-boggling array of financial crimes. His criminal trial in Virginia federal court currently rivets the nation, generating breathless and sensational headlines.

The 32-count indictment charges Manafort with disguising more than $30 million in overseas income by moving it through offshore accounts (aka money laundering), as well as lying to banks, evading taxes, submitting fake invoices to clients, and other serious crimes. Manafort must stand a second trial on separate charges in September. If convicted in either trial, Manafort could spend the rest of his life in prison.

Of course, Mr. Manafort is innocent until proven guilty. However, as I’ve watched his trial unfold in recent days, it got me to thinking that when preyed upon by financial crooks, average investors are at a serious disadvantage. Infamous conman Bernie Madoff also comes to mind.

As the world now realizes, Bernard L. Madoff Investment Securities was a vast Ponzi scheme. Uncle Bernie, as people called him, stole an estimated $50 billion, making it the largest financial fraud in U.S. history. Once known for a lavish lifestyle, Madoff is now serving a 150-year sentence in the super-max wing of New York City’s Metropolitan Correctional Center.

Among Madoff’s victims were scores of celebrities. But you don’t have to be famous; it could happen to anyone.

The epidemic of rip-offs…

The prevalence of financial rip-offs has reached epidemic proportions. According to a recent study conducted by the National Center for Victims of Crime and the Financial Industry Regulatory Authority (FINRA), about $50 billion is lost annually in the United States from schemes that defraud individuals.

The highest losses from these financial crimes every year occur under the category of investment fraud (see chart, compiled with data from the two organizations):

As you can see from the chart, a lot of seemingly ordinary brokers and financial advisers don’t have their clients’ best interests at heart.

As FINRA puts it: “Financial fraudsters often attempt to evoke strong emotions in their victims to convince them to hand over money, and seniors may be particularly vulnerable to the effects of heightened emotions on decision making.”

Below, I provide 10 tips to avoid getting ripped off.

1. Verify the existence of a third-party custodian.

When you write a check to a financial adviser, the check should go to an independent custodial organization. Typical examples of a custodian would be a major brokerage firm, such as Charles Schwab, T.D. Ameritrade, T. Rowe Price, or Bank of America’s Merrill Lynch. Obtain the name of the firm and its contact information; make sure it exists and it’s receiving your money.

Madoff’s investors received their statements directly from Bernard L. Madoff Securities — and that should have been a red flag. Madoff simply created a counterfeit paper trail, with bogus receipts.

2. Make sure an independent auditor is involved.

Ask who audits your adviser and make sure they’re legitimate and duly licensed to operate in your state. Madoff used a small, unknown accounting firm that was beholden to him, which created a conflict of interest. In return for its fees, the minor league auditor looked the other way.

3. If your adviser has recently switched accounting firms, determine why.

New accounting firm? That’s another red flag. If your adviser has dumped his accounting firm, maybe it was because the accountants responsible for verifying the books felt uncomfortable and had been raising a stink.

4. Do your homework; investigate the adviser’s background.

Conduct background checks of your adviser, starting with FINRA, a private group that regulates the financial advice industry. They’ll let you know if there is a history of sanctions, disciplinary actions or client complaints against your adviser.

Also consult online reviews from other advisers and traders, which can give you insights into a wealth management firm’s strengths and weaknesses, as well as its integrity.

5. Be suspicious of a client network held together by a common culture.

Fraudulent advisers find it easier to fool clients by making appeals to their group identity, whether it’s religious or ethnic. You should remain dispassionate and not make investment decisions based on emotional ties.

The infamous financial crook Charles Ponzi preyed on the Italian heritage of his victims. Manafort stands accused of tapping into and ripping off a network of Russians. Madoff played the “Jewish card” and attracted a clientele heavily comprised of high net worth individuals from Jewish charities, businesses and philanthropic foundations. In particular, many members of New York’s Upper East Side elite had plowed their life savings into Madoff’s firm — and lost everything.

6. Verify all academic credentials and professional certifications.

Many employers don’t fact-check resumes of job candidates, a lazy practice that they usually end up regretting. It’s easy for someone to say they graduated from Harvard or earned a certain professional certificate.

Don’t take your adviser’s word on anything; check his background. If he cites an Ivy League education, give the university a call to make sure it’s true. You’d be surprised at how brazenly some people lie about their academic record.

7. Make sure you understand the adviser’s management strategy.

Don’t blindly accept any assertion that your adviser has a foolproof way of making money. Learn his or her game plan. Madoff handed his gullible clients big returns every year, even during market slumps. They took it on faith that he had a magic touch with money, when in fact he was hiding losses. Also, make sure you read the fine print of any agreement. Hidden fees and costs can add up.

8. If you’re unable to withdraw money, call the financial cops.

If you attempt to make a withdrawal and you’re told that you can’t, immediately contact the SEC or the FBI. Ponzi schemes start to fall apart when investors try to take out their money but there isn’t enough to go around. Unfortunately, by this point, it’s usually too late to get your money back.

9. Be suspicious of extremely low management fees.

Top-tier wealth managers who are legitimate typically charge hefty fees and commissions to their well-heeled clients. If a prospective adviser’s come-on includes bargain basement rates, it’s a warning sign that he or she has figured out other ways to get their paws on your money.

10. Don’t be swayed if the adviser touts associations with the rich and famous.

Associations with movie stars and high-profile charities don’t make you money and they’re just meant to dazzle you. Name-dropping is no substitute for solid financial acumen and performance. Besides, if you dug deeper, you’d probably discover that the celebrity ties are tenuous at best or bogus at worst.

Want straight, honest answers to your investment questions? You can reach me at:

John Persinos is the managing editor of Investing Daily.


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