A 2009 survey of CERTIFIED FINANCIAL PLANNER™ professionals found that 60% of respondents knew a consumer who had experienced fraud or abuse at the hands of another advisor and the most likely targets of financial fraud or abuse were senior citizens, aged 61-75. (According to the Elder Financial Planning Network, seniors have lost $2.6 billion to financial mismanagement or abuse.)
Here are our final two red flags in the series of “red flags,” taken from a CFP Board survey of situations reported by CFP® professionals where a consumer had been taken advantage of by a financial advisor. Each of these red flags:
- Identifies a common situation where consumers may be victimized.
- Describes the warning signs of fraud or abuse.
- Shares real-life situations in which consumers were abused.
- Shows you what you can do to protect yourself.
Common Situation #9 Follow the Money
“I can replace that with something better.”
Better for whom? Ethical financial advisors are always on the lookout for ideas and investments that make their clients’ lives better. In contrast, unscrupulous advisors typically base their buy/sell decisions on the size of their commission or fee. Because selling sometimes feels like admitting a mistake, a suggestion to sell for “something better” can be a powerful motivator for investors—and a recipe for trouble in the hands of a scam artist.
Spot the Red Flag #9
- An advisor convinces a client to replace a variable annuity as soon as its surrender charges have expired, telling the client that this is a “tax-free” transaction. The advisor makes $80,000 in undisclosed commissions on the replacement annuity. The client now faces a renewed period of surrender charges.
- At the suggestion of his advisor, a client buys an insurance policy with an extravagant premium—nearly half the client’s annual income! The client has no beneficiaries and doesn’t need the insurance for estate planning. What triggered the decision to buy? The advisor recommends the policy as a “tax-free investment” likely to perform better than other investment options.
Self Defense Moves #9
- Whenever you are presented with a proposed transaction, ask, “What does this cost me?” In particular, ask about surrender charges, loads, commissions, internal expenses, or other transaction charges. (The existence of charges isn’t an abuse; not being told about them is.)
- Always ask your advisor, “What do you get from this transaction?” Third-party payment or commission isn’t a red flag all by itself. But if the benefits for you aren’t enough to justify that commission, look for other investment options.
- Consider whether the timing of proposed transactions is motivating the recommendation. Too frequently, new annuities are sold just as the surrender charges on existing annuities have disappeared, or an advisor suggests a replacement insurance policy or financial product just as she moves to a new firm.
Common Situation #10 Ask, Ask, and Ask Again
“It’s very complicated. No need to bother you with all the details.”
Financial matters are complicated. That’s why we rely on advisors in the first place. Unfortunately, lack of financial expertise—or other issues, such as dementia—can make clients vulnerable to fraud.
Spot the Red Flag #10
- An elderly client asked her bank for a better rate on her CD. She walked out with an annuity that could not be surrendered for more than 10 years without a steep sales charge. The client had no idea that her new investment worked very differently from her old one.
- A client had never heard of the companies he held as individual stocks in his advisor-managed portfolio. He discovered this only after incurring substantial losses.
- A client was unaware that his brokerage company had been named as the trustee in his estate planning documents—and that the named trustee could not be replaced.
Self Defense Moves #10
- Tell your advisor when you don’t understand something. Ethical advisors will be happy to explain: they know that the best clients are well informed clients. If you don’t understand the explanation, ask again.
- Forget about handing over your financial decisions to a professional because you don’t want to be bothered. At a minimum, you must be able to assess whether your advisor is helping you.
- If necessary, get a second opinion on your advisor’s recommendations or approach. The cost of another set of eyes is trivial compared with the potential cost of fraud or abuse.
- Plan for the possibility that you may not be able to handle your own affairs. Give power of attorney to a trusted friend, relative, or professional to make financial decisions in the event that you cannot act on your own behalf.
Pacific Wealth Management hopes that you found this series of Red Flags useful. If you would like to see the CFP Board’s Consumer Guide to Financial Self-Defense in its entirety, please click here.