We’ve all heard of voodoo economics, but voodoo investing?
was convicted earlier this week of fraud, found to have bilked 46 listeners, advisory clients and friends who trusted her out of some $ 20 million in a Ponzi scheme. Prosecutors say she used voodoo in an otherworldly attempt to escape justice.
Founder and CEO of Bennett Group Financial Services (now a defunct firm) and the host of weekly radio program “Financial Myth Busting with Dawn Bennett,” Bennett reportedly used investor money to pay Hindu priests in India for ceremonies to ward off investigators looking into her business practices. Stranger still, she wove voodoo spells around jars of beef tongue, labeled with Securities and Exchange Commission lawyers’ names, that she stored in a freezer at home in hopes of keeping the feds quiet — apparently to no avail.
Bennett, 56, had promised a 15 percent return on investments in her new luxury sportswear company but actually used the money to fund an extravagant lifestyle, say government investigators. If it sounded too good to be true, that’s because it was.
Unfortunately, otherwise intelligent, even savvy, investors often fall victim to financial scammers, said certified financial planner Douglas Boneparth, founder and president of Bone Fide Wealth in New York. Just look at the unfortunate, and often well-heeled, clientele of convicted fraudster Bernard Madoff.
“People, fundamentally, are willing to throw out the window principal disciplines in investing — diversification, risk and return … that you have to abide by to keep yourself out of trouble,” he said. “People are constantly … kicking them to the curb over the allure of attractive returns.”
Granted, the Bennett case is an extreme example, in terms of both the returns promised and the lengths gone to cover up misdeeds. But financial advice and investment management, like any industry, is prone to more mundane types of professional mischief, and even if you’re not chasing pipe-dream profits, you can still be victimized.
“There are bad actors throughout any industry … and they’re going to unfortunately leverage their relationships with people and take advantage,” said Barry Glassman, CFP and founder and president of Glassman Wealth Services. “What you want to avoid are the easier, obvious ones. You want to enter with caution.”
So how is a prospective client to proceed when vetting a potential financial advisor? How to ensure your advisor is on the up and up — but not way out there?
“The good news is, we happen to have … some significant checks and balances [that] have been stepped up since the financial crisis, more specifically since Madoff,” Glassman said. “I believe the public is much better informed today to ask the right questions and make sure the checks and balances are there.”
Tim Maurer, CFP and director of personal finance at Buckingham and The BAM Alliance, stresses that you need to make sure your prospective advisor is actually educated.
“Financial planning is a very broad discipline,” he said. “It’s not just about investments, it’s not just about insurance — it’s about an array of topics that also includes taxes.”
Glassman and Boneparth agree that education and credentials matter. Asking whether an advisor has a CFP designation is a good place to start, as it “demonstrates an academic understanding and the fact that they’ve dedicated themselves to the very profession that they’re in,” said Boneparth.
A CFP is also more likely to take a holistic approach to financial planning and not focus solely on investment gains, he added. A lot of disasters can be avoided altogether by taking this tack. “If you are investing without really having any goals … how can you actually have the context over how many risks you should be taking and what kind of returns you should be looking for?” said Boneparth.
“We should be past the point where people are knocking on the doors of financial professionals looking for investment solutions,” he said, adding the end game should be solutions that lead to constructive decisions and the pursuit of defined financial goals. “If it’s not that, nine times out of 10, it’s baloney.”
Another good source for finding a reputable advisor can be someone, perhaps another professional, you already trust. “A solid recommendation can come from a friend, a CPA or an attorney,” said Glassman. “That’s really an independent recommendation and chances are that person has worked with them before — especially if it’s another professional.”
Once you have a name, you should also do a little investigating of your own, said Boneparth. “You can get a great deal of information by simply doing the appropriate background check,” he said, pointing to FINRA’s BrokerCheck tool at https://brokercheck.finra.org and the SEC’s Investment Advisor Public Disclosure site at https://adviserinfo.sec.gov. “It’s free and online [and] you can see disclosures, what businesses they’re in, how much money they manage, who they’re associated with, [and] any past disciplinary actions.”
You can also query advisors yourself, using materials prepared by organizations such as the Financial Planning Association, said Glassman. “The FPA and the Board of the CFP have put together pretty great due diligence questionnaires for new advisors,” he said. “The big questions are who holds my assets, what are the investments and how will I know what they’re doing?” The FPA offers free downloads of its questionnaire at www.plannersearch.org.
Finding and vetting a financial advisor
- Check education and credentials. A certified financial planner (CFP) designation is a good indicator of quality.
- Seek recommendations from friends and professionals such as accountants and attorneys.
- Run background checks with FINRA and the SEC.
- Interview prospective advisors, armed with questions from FPA and similar organizations.
- Make sure the advisor operates under a fiduciary standard.
One of those questions might be how long an advisor’s been in business. The financial advisor you want to work with should have at least five years’ experience, said Maurer, “but I like 10 or 15, especially because they will already have been through multiple serious financial crises.”
Lastly, make sure the advisor operates under a “fiduciary” standard. A fiduciary has a legal and regulatory obligation to act in a client’s best interest at all times. “Would you believe … that not all advisors have made that commitment?” asked Maurer.
“Do your homework,” Maurer added. “Make sure that you find the right financial advisor for you.”
In the end it’s all about relationships, said Boneparth.
“What we tend to see is deeper relationships with professionals who engage in financial planning because it’s all-encompassing of [clients’] regular lives and financial lives,” he said.
“I believe in that so much that when I meet with prospects for the first time, I tell them one of the things I want them to walk out of that meeting [with] is knowing how to work with a financial professional — even if it’s not me.”