Do you know who is managing your money?

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As investors look for guidance in these troubled markets, one question can’t be avoided: Whom can you trust? During boom times, it was easy to hire a financial adviser and jump in the market. Now the market is in chaos and thousands of investors have been devastated by fraud, with Madoff threatening to become only one of many con-artists. Having an investment professional on your side is crucial to your financial well-being. But how can you guarantee that your expert is reliable? The short answer is that you can’t. But you can do your homework and at least be a lot more sure that you have picked a trustful adviser.

Think like a CEO and not like a client: Realize that you are ultimately responsible for your family’s money. Consider yourself a chief executive of your own investment company. As a CEO, you simply delegate the everyday details of money management to your adviser and you don’t let them run off with managing your money. Approach your advisers like a boss — not just a client. Put your adviser through a tough job interview and ask few big questions:

1. What’s in the adviser’s background? Look at a potential adviser’s criminal and regulatory record, as well as past employment history. For advisers managing under $25million check the FINRA website and for advisers managing more than $25million check the SEC website. Look for which states and regulatory organizations that the advisers are registered with, the licenses they hold, criminal history, customer disputes, fraud or excessive buying and selling of securities and financial disclosures, including bankruptcies.

2. What do the adviser’s clients say? Don’t simply depend on the reputation of a big firm or recommendations from friends, family or members of your country club. Bernard Madoff got positive recommendations from many noted people. Ask for references from past and current clients in life situations similar to yours. When talking to the clients, get specific about their experiences with the adviser.

3. How does the adviser get paid? Advisers use many compensation structures. They may get a commission on the securities they sell; charge fees, either flat or a percentage of the assets they manage for you; work at an hourly rate; or a combination of all of them. Be wary of anyone who shies away from answering these questions in a transparent way. If advisers take a percentage of assets as a fee, remember that they may be inclined to advise you to avoid moves that may reduce those assets. Also be wary of an adviser who charges more than 1% or 2% of assets.

4. Where are the adviser’s checks and balances? The big factor in the Madoff scandal was the lack of third party supervision. Mr. Madoff’s clients wrote checks and wired money to, and received statements from, Bernard L. Madoff Securities. The operation’s auditing firm, Friehling & Horowitz, had only one licensed accountant and was operating out of a storefront in New City, N.Y. When purchasing investments, make sure you are writing checks to a third-party custodian, not to your financial adviser directly. Call the independent institution to verify it’s serving your adviser, and never send checks anywhere but that firm’s business address. Don’t allow your transaction confirmations and account statements to be mailed to your financial adviser instead of you. Likewise, find out what auditors your adviser’s firm uses.

5. What’s the adviser’s track record? Ask your adviser for a specific track record. How many clients beat their benchmarks or are in line with their goals? Use the advisers’ record to understand how they make decisions and ask specific questions. If you feel the feel they are avoiding the question or putting a positive spin on everything, it’s a red flag. Finally, be watchful for claims of all-too-consistent returns. No adviser can deliver 10% to 20% returns every year. More reasonable and trustworthy is an adviser who says you may get 10% one year, 2% the next and so on.

6. Can the adviser put it in writing?

Ask for a formal written outline of the services the adviser will be providing and what fees you will be paying. Make sure outline explains investment strategies, specific benchmarks and suggested financial products. If advisers can’t explain their plan in simple terms, another red flag should go up. Secret strategies like those touted by Mr. Madoff are no longer acceptable.

7. What do other pros think?

Think like a CEO and not like a client and double-check any big moves. Know the basics behind your investments, insurance, estate planning and taxes, and then turning to other experts for confirmation. If your financial adviser recommends investing in commodities, read up on recent news affecting the commodities markets and then search out an expert and ask questions. Just like you would ask a specialist for a second opinion on your doctor’s diagnosis, ask your accountant, lawyer and other financial professionals for their opinions on individual strategies.

Anna Timone (195 Posts)


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