Resource #7: The Most Important Tip For Avoiding Investment Fraud

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If you’ve ever seen the TV show American Greed, it profiles financial criminals and the victims of their fraud. Show after show, they walk viewers through the grueling details and the financial devastation it causes everyday Americans. Not only is it heartbreaking to watch people struggle as a result of their illegal actions, it’s also frustrating because it gives the financial services industry a bad name.

In episode after episode I find that there is one simple thing investors could do to dramatically reduce their susceptibility to investment fraud. I don’t want to muddle the importance of this tip with others, or give you a long list of questions to memorize or ask. Just a clear directive to understand and apply third party asset verification.

It may sound complex and sophisticated but simply means that you are receiving your account statements from someone other than your financial advisor. This is very important for a number of reasons.

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First, in some cases of fraud, the advisor involved didn’t start out with the intent to steal from others. Like perpetrators of other white collar crimes such as corporate embezzlement, an advisor may have fallen on hard times or got caught up in a luxurious lifestyle.

As a temporarily fix, they dip into an account or two, with aspirations to put it back. It’s an open door to temptation that investors should close immediately because once an advisor crosses that unethical line, things can quickly spiral out-of-control quickly.

In other cases, fraud is the goal from the get-go. Perpetrators simply take an investors money and use it as their own. They never actually opened an account in your name, nor purchase any investment holdings for you. They’re just pocketing the money and sending out a phony statement each quarter.

Access to statements was a major issue with the Bernie Madoff’s $65 billion dollar Ponzi scheme. For years he simply walked into his private office, whipped out his calculator and BAM! client statements reflected whatever numbers he concocted in his mind. As a result, the fraud continued for over 20 years according to some investigators, simply because people assumed (but did not verify) that they were still making money.

I wish Madoff was the only example of this crime but it’s the primary trick fraudsters use to keep their scam alive year after year. If every time you open your account statement, and in both good and bad markets the balance is going up, most people don’t question the good news. And that’s exactly why it’s worth an annual call to a third party to make sure your money and investment holdings reflect reality.

Investment fraud brings to mind one of my favorite mantras, “No one cares more about your money than you. Therefore, before you invest with any advisor, make sure a separate company (third party) will be holding the funds and will be responsible for reporting all the details to both you and the IRS.

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This is relatively easy to accomplish, thanks to online brokerage accounts. For example, many advisors use platforms like TD Ameritrade, Scottrade, or Charles Schwab to manage a clients’ assets. The account is opened in the client’s name and for the benefit of the clients.

While an advisor can trade inside the account, take fees, and put their logo and address on the statement, they can’t magically add 5% or 10% to your ending account balance each month. Furthermore, near the bottom or back page of most third party statements there is a toll-free number you can call just to make sure everything matches up between your statement and the information they have.

This verification process is critical. Criminals will go to great lengths to steal from people. In our information age, many people have the option to request e-statements. Just make sure you are receiving your e-statements from the third party, not your advisor. It wouldn’t be difficult for a scammer to request these e-statements be sent to them at an email address of their choosing, after which they can doctor up the statement and then forward it to you.

So, whether it’s paper or email statements, contact the third party to verify your assets. It may greatly reduce the incidence of becoming a guest on American Greed and victim of investment fraud.

Next Steps

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3) Develop A Plan For The Non-Financial Aspects Of Retirement

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About the Author:

As the Retirement Activist, Robert Laura created the Retirement Coaches Association and He is the leading voice for the retirement coaching industry and has pioneered many tools and resources to help people prepare for the non-financial aspects of retirement including the Certified Professional Retirement Coach CRPC training and designation.

He is the author of several books and guides including Naked Retirement and Retirement Rx. He is also a nationally syndicated columnist for and Financial Advisor Magazine. Robert is a sought-after corporate trainer, speaker, consultant, and financial expert witness. He can be reached here