Starting on the journey to life planning and securing your retirement and your children’s future is a daunting task. Novices often look to financial advisors, insurance brokers, and other professionals who can make the process a little easier by providing you with sound advice for putting the correct contingencies in place to plan for the future. But, you need to be sure to protect yourself from fraud and scams and choose the best people to help you with your life planning goals.
Learn about Investment Fraud and Scams
While most financial advisors are not like Bernie Madoff and swindling innocent victims out of their retirement savings, some do scam their clients. It is important that you educate yourself about potential investment fraud and scams to better protect yourself and your finances.
Some of the more common forms of investment fraud and scams include Ponzi schemes, affinity fraud, misrepresentation scams, unrealistic returns, and churning.
- Ponzi schemes are scams that include the payment of returns to existing investors using funds from new investors. Simply put, the new investors believe they are investing for themselves but find their money went to existing clients and the person at the core of the Ponzi scheme siphons money to himself.
- Affinity fraud targets a specific group of people and frequently occur in conjunction with Ponzi scams. The group being scammed is targeted by people sharing their religion, cultural background, or another factor that builds in trust to make it easier to scam new investors.
- Misrepresentation scams involve financial advisors scamming unsuspecting investors by misrepresenting their credentials. People typically aren’t aware of the various credentials or licensing requirements for financial advisors, so they take their advice, hand over their money, and wind up losing it all when the scammers move on to their next victims.
- Unrealistic returns are a common trick used by some financial advisors who promise or guarantee higher than market returns for investments. Reliable advisors typically will not offer returns higher than 12-15%, so if your advisor does, there’s a chance he is scamming you.
- Churning typically is used by stockbrokers or financial advisors who frequently buy and sell trades. These unnecessary trades make the brokers and advisors money but are not sound trades for investors.
Vet Your Financial Advisor Before Making Any Investments
Once you educate yourself about potential investment fraud and scams, take steps to verify your financial advisor’s background. Look to see whether any complaints have been lodged against him or whether any disciplinary action has been taken against him. Sites such as www.finra.org/brokercheck and www.adviserinfo.sec.gov are good places to start. It’s also worth your while to know exactly how your advisor will be compensated; ask about and verify all his fees before signing an agreement with him or making your first investment. Finally, when you have a couple of financial advisors in mind, contact their satisfied, long-term clients and make sure they are legitimate references.
Stay on Top of Your Own Finances
Even if you are a life planning novice, you can stay on top of your own finances. You should regularly balance your checkbook, keep tabs on checking and savings accounts balances, review credit card statements, and be sure you have the correct amount of cash in your wallet.
If you have a loved one who is an addict, beware of addiction-related fraud. Unfortunately, loved ones struggling with substance abuse become desperate for drugs or alcohol and steal from friends and family members. Protect your cash in a safe at home or in a bank and keep your checkbook out of sight. Regularly check to be sure you aren’t missing any checks or cash. Make sure the person struggling with addiction does not have access to your social security number, credit card accounts, or bank accounts. Contact your bank and credit card companies to enroll in alerts for unusual spending. Being proactive is the best way to protect yourself and your life planning goals from addiction-related fraud.
Novices find it easier to enlist the help of financial advisors, insurance brokers, and others when approaching life planning. However, you need to be aware of potential fraud and scams and know how to choose a legitimate professional to help you secure your retirement and your children’s future. Keep in mind that staying on top of your own finances is an important piece of life planning that you can do yourself.