Tips How To Prevent Financial Abuse

Tuesday, April 10, 2012, 6:00 AM | Leave Comment

It has become an almost daily occurrence that we read about financial abuse in one form or another. There is seemingly no end to it.

The scammers and financial abusers are in abundance and so are the innocent consumers by and large. It’s a shame that many folks fall for the abuse. They let themselves get abused financially by the culprits in the society.

American society is huge and if 1% of the over 300 million folks living here are scammed every year, that’s over 3 million people. It’s sad but even the most sophisticated investors can fall prey to it, as the Bernie Madoff saga clearly demonstrates.

The thrust of the matter is that we gotta stop blaming the culprits and start blaming ourselves for falling prey to financial scams. Their job is to try to empty our pockets whereas our job is to protect our pockets.

Sorry to say that the most likely targets of financial fraud or abuse were senior citizens, aged 61-75 in 2009 when, according to the Elder Financial Planning Network, they lost $2.6 billion to financial mismanagement or abuse. It seems that every year, the abuse has been on the rise.

Anyone we can trust?

To be sure, you want an adviser you can trust and an overwhelming majority of them are decent and honest. But knowing someone as a person doesn’t mean you know him as an adviser. People take it on faith that the adviser is who he appears to be – that the credentials on his business card are legitimate. Yet blind trust often invites disaster.

How to defend yourself?

Even if it’s your next door neighbor, it’s your responsibility to check out the financial adviser’s credentials. Your kids playing together doesn’t produce a good financial adviser. Whatever the details, the person claiming to be a financial adviser does not make him so. Be warned to do your own research about the person.

There are government agencies and independent organizations to check whether the financial adviser is legitimate or not. Be very diligent in choosing your adviser.

  • Brokers are regulated by FINRA

  • Investment adviser by either the SEC or a state securities regulator

  • Insurance agents by the state insurance commission in states in which they do business

  • CFP professionals by CFP Board

Ask questions in choosing your financial adviser every step of the way.

  1. Fiduciary Duties

    Just like under the corporate law of most states, directors must discharge two primary fiduciary duties, namely the duty of care and the duty of loyalty, we must hold the financial adviser to a high standard as well.

    The adviser must provide services with the duty of care of a fiduciary. The duty of care requires financial adviser to make a business decision based on all available and material information and to act in a deliberate and informed manner.

    This obligates the adviser to fully disclose any conflicts of interest. Ask about the duty of care. If the adviser avoids the question or doesn’t understand the term, go elsewhere.

    • What to do?
      Ask your prospective adviser to identify the organizations that license or supervise him. Use these organizations’ Web sites to check the adviser’s background and disciplinary history, if any.

      Inspector Clouseau once said: “I trust no one.” After a couple of seconds, he said: “I trust everyone.” Trust, but always verify. With your very livelihood and future security of your hard-earned money at stake, you can’t afford to hire a financial adviser without a background check.

  2. Just sign here and I will do the rest

    Never sign any loan documents that contain blanks. This leaves you vulnerable to fraud – Source: FBI Financial Crimes Report to the Public, FY 2009.

    • What to do?
      Whoever tells you to just sign here and I will do the rest, look for another financial adviser. Regardless of the paperwork burden, do not leave blanks that someone else could fill in without your knowledge or consent.

      Ask your adviser to send you copies of the final, submitted documents. These should be clearly marked with the word final and the date the document was completed. That gives you hard evidence should a discrepancy arise later.

  3. This is just for my special clients

    That’s an old trick in the book. Stay away from an adviser who says you are their special client. There are no secret markets in which banks trade securities. Representations to the contrary are fraudulent – Source: US Treasury Department, 2010.

    • What to do?
      Ask your adviser to verify – in writing – that his employer or company supervises the investment. If your adviser is a sole practitioner, verify that she carries professional liability insurance.
  4. We’ve known him forever. I’m sure you can trust him

    60% of CFP certificate holders know a victim of fraud or abuse at the hands of another adviser – Source: CFP Board 2009 and 2010 Surveys.

    • What to do?
      It’s your hard-earned money. You should do your own research and not just hire a professional because of other advisers’ recommendation.

      Make sure you receive regular statements from independent third party sources. Usually, these sources are the custodians of your assets—either a brokerage firm or a trust company. Reconcile the statements with reports you receive from your adviser, and ask about any discrepancies.

  5. I’ll send you all the investment reports

    Thirty million Americans ages 18 and older, or 13.5% of the U.S. adult population, were victims of consumer fraud during a one year period – Source: Federal Trade Commission’s Fraud Forum, 2009.

    Remember Bernie Madoff. He made similar promises. Madoff’s reports showed account balances that had long since disappeared into his purchases of boats, mansions, and cars.

    • What to do?
      Make sure you receive regular statements from independent third-party sources. Usually, these sources are the custodians of your assets—either a brokerage firm or a trust company. Reconcile the statements with reports you receive from your adviser, and ask about any discrepancies.
  6. Make the check payable to me…

    Complaints to the SEC of Theft of funds or securities more than doubled from 2008 to 2009 to 1,238. This was the largest increase among the complaint categories – Source: U.S. Securities and Exchange Commission FY 2009 Annual Complaint Data.

    An adviser deposits a client’s check, made payable to himself, into his own account for his own use. He then issues fraudulent statements, leading the client to believe that the funds have been invested just like Bernie Madoff did.

    • What to do?
      Never make a check payable to an adviser. Never leave the payee line blank. If you pay a fee for the adviser’s services, always make the check payable to the adviser’s business.
  7. I know it’s a difficult time, but you need to decide now

    When the economy falters, it’s a prime time for scams. Con artists target people who are desperate for quick help with their money problems – Source: Consumer’s Union, July 14, 2009.

    • What to do?
      Be suspicious of pressure tactics or sales pitches during a major life change. It’s best not to make important decisions for at least a year or two after a personal loss.

  8. This one’s a no-brainer. You can’t lose

    An analysis of Madoff’s returns versus the S&P 500, showed that he only had three down months versus the market’s 26 down months during the same period – Source: SEC investigation report against Madoff, August 31, 2009.

    • What to do?
      When your adviser recommends a fund, insurance contract, or retirement strategy, listen carefully for a fair, complete discussion of the pros and cons. Write them down. If you’re hearing only pros, you’re not getting the full story.

  9. This offer is good for today only

    The “Scarcity Tactic,” or implying that something is rare or scarce, is one of the most common persuasion tactics used in investment fraud – Source: “Outsmarting Investment Fraud” by
    the SEC, AARP and FINRA

    • What to do?
      Give yourself plenty of time to mull over an investment before you decide. Don’t act until you fully understand what is being offered.
  10. I can replace that with something better

    This is called churning. It refers to the excessive buying and selling of securities in your account by your broker, for the purpose of generating commissions and without regard to your investment objectives. Churning can be a violation of SEC Rules and other securities laws – Source: SEC 2009, April 15, 2009.

    • What to do?
      Ask about surrender charges, loads, commissions, internal expenses, or other transaction charges. Note: The existence of charges isn’t an abuse; not being told about them is.
  11. It’s very complicated. No need to bother you with all the details

    Financial abuse costs elders more than $2.6 billion annually, though four in five cases are not reported – Source: MetLife Mature Market Institute Study, March 2009.

    • What to do?
      Tell your adviser when you don’t understand something. Ethical advisers will be happy to explain. They know that the best clients are well-informed clients. If you don’t understand the explanation, ask again.


In a Nutshell
In all these cases, simply just SPEAK UP. Tell the adviser to hold off to any proposal he is making to you, especially the one you don’t understand. Don’t make a decision right away. Do research. Ask family and friends.

Source: Certified Financial Planner (CFP) Board of Standards, Inc.

Throw us a like at

Post a Comment on Content of the Article


This is not a billboard for your advertisement. Make comments on the content else your comments would be deleted promptly.

CommentLuv badge