The Certified Financial Planner Board of Standards has published the Consumer Guide to Financial Self Defense. The report lists “red flags” and “self-defense moves” that individuals can take if they run into any of the red flags.
Here are a few examples of the moves they suggest.
- Ask your financial advisor to tell you the organizations where he/she is registered – then check the organizations to see if there are any complaints filed. Brokers are registered by FINRA; investment advisors by either the SEC or state securities office; insurance agents by their state insurance commission; and Certified Financial Planners by the CFP Review Board.
- Do not allow your advisor to complete forms for you, regardless of the paperwork burden. Also, ask your advisor to send you copies of any final, submitted documents.
- Make sure you receive regular statements from independent third-party sources, such as the custodians of your assets. Compare these reports with any you receive from the broker or advisor.
- Be suspicious of any pressure tactics or sales pitches when you are going through a major life change (e.g., death of a loved one, divorce, etc.). Avoid making important financial decisions for at least a year or two after a personal loss.
- Do not believe anything that sounds too good to be true. For example, Bernie Madoff’s returns, when compared with the S&P 500 showed 3 losing months when the index had 26 and a maximum loss of 1.44% compared with the market’s maximum loss of 14.58%. Wayne McLeod (called “mini-Madoff” by Business Week) victimized federal law enforcement officers with his “special fund” that promised a tax-free yield of 8% from government bonds. Both Madoff and McLeod were running Ponzi schemes.
- Do not invest until you fully understand the investment. Former SEC Chairperson, Chris Cox, said: “Never invest in anything you don’t understand.”
- Know how the advisor is compensated. A fiduciary will tell you upfront if their compensation is based on the investment they are recommending. If your advisor does not tell you, be sure to ask.
As a federal employee, it is vitally important that your financial advisor understand federal benefits. These articles I wrote previously tell you some of the things your advisor should know about your federal benefits in order to properly advise you: