With the continued revelation that several financial advisors committed fraud and scams that resulted in people losing substantial money, many people have expressed concerns about who to trust with their personal investments.
While it is valuable to seek the advice of a financial advisor to handle your investments, it is also important for investors to know what an investor should do to help ensure that they are not a victim of fraud. It is essential to live by the Ronald Reagan adage of “Trust, but verify”.
The following is a list of 8 items that all investors should be aware of when it comes to their personal accounts.
1) Whether you are opening a new account or adding funds to an existing account, never make a check payable to your advisor or wire any money to the advisor/broker’s individual account. The check should be made payable to an independent custodian for the benefit of yourself. For example, TD Ameritrade FBO ‘John and Jane Smith’.
2) Make sure to periodically review the statements from the custodian to verify that the balances are the same as reported directly from your advisor/broker. If there are any discrepancies or there is anything you do not understand, speak with your advisor immediately.
3) There is no free lunch. Unless all of your money is in cash, expect some down periods: months, quarters and depending on the risks you have taken, years. The more money that you have invested in stocks, the more likely your portfolio will have times of temporary declines.
If a broker or an advisor is telling you they have found a way to provide stock market returns without the volatility of negative time periods, they are lying. This Holy Grail of Investing does not exist. Risk and Return are related.
4) Yields indicate risks. Thus, for cash reserve accounts and bond accounts, it is generally not always worth the risk to achieve the higher yield. An important exception is a bank account or a CD that is covered by FDIC insurance. (Limits apply, so be sure that your entire account or CD is under the limit for FDIC insurance.)
5) Be realistic. Your portfolio should achieve a return in proportion to the risks that you have taken. You will not receive substantial returns unless you take substantial risks. You need to spend the time necessary to determine the amount of risk that you need and are able to withstand in order to reach your individual goals.
6) Your broker does not have the ability to predict the future of a stock or sector with certainty, especially over a short-term frame of less than 5 years. Use diversification to spread your investment “eggs” to many baskets.
7) No advisor or broker is so smart that they have a devised special strategy that needs to be kept hidden in order to achieve the high rates of return. If the advisor can not explain the investment strategy to you so that you can understand it, find another advisor.
8) Lastly, even if the advisor/broker has been recommended by your best friend or family member, do not just assume that the advisor can be trusted. You still need to ensure that these steps are taken to protect yourself from those who are preying on your assets. “Trust, but verify”.
These might seem like pretty basic points, but I would imagine that many people who have been victims of the many frauds uncovered in recent times wish they had paid attention to one or more of them. Keep in mind that although you may seek the advice of an advisor when it comes to your investments, ultimately you are responsible for your own financial future and it will pay to have a better understanding of what one can do to verify the safety of your portfolio.
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