Your guide to profitable and socially responsible investing
By Judith L. Seid, CFP ®
By now you've probably heard about the $50 billion Ponzi scheme perpetrated by Bernard Madoff, a New York City broker, former head of the NASDAQ stock exchange.
What did he do? He allegedly collected money to invest from clients, made up false statements to show that they were doing well, and used new clients' money to pay interest and withdrawals to existing clients. This is known as a Ponzi scheme and is estimated to involve more than a $50 billion loss for his investors. This is one of several recent high-profile cases of advisors and/or managers absconding with funds entrusted to them by their clients. Maddof held his clients' assets, managed them, and priced them, too. See the conflicts of interest? Investment performance can look better if the prices reported to clients are manipulated, which is allegedly how Madoff showed winning year after winning year despite market turmoil.
I recognize that some of you, and your friends and neighbors, may reasonably ask themselves: "I trust my advisor, but what if I'm wrong?" This issue is rarely brought up. I suspect it has to do with the fact that clients are uncomfortable asking this question, as they think their advisor will become defensive about it or interpret it as a sign of distrust. Quite the contrary; your advisor should be comfortable addressing any issue regarding the safety of your investment assets.
So how can clients protect themselves from their advisor stealing their funds?
- Make sure that your accounts have an independent custodian holding your funds. This could be an entity such as Schwab, Pershing, a mutual funds directly, or one of many other custodians. This means that you will never write an investment check made out to your advisor's firm. It is the custodian's responsibility to keep client funds safe and each client receives statements directly from the custodian, confirming the location and safety of the assets. The only power your advisor should have over those accounts is as follows:
-- To make trades in the account
-- To receive copies of monthly statements, tax documents and trade confirmations
-- To deduct management fees directly from the accounts, if applicable.
- Use a Certified Financial Planner -- those with the CFP designation have more training than others and must adhere to a strict Code of Ethics mandated by the Financial Planning Association.
- Stick with investments you can understand. If you have invested in stock and bonds, you can check easily compare your performance to the indexes that correlate. For example, if you have a stock portfolio, compare it to the S & P 500. Make sure your advisor can explain and you can understand any performance that is inconsistent with benchmarks.
- Avoid the elite, exclusive club mentality -- People desired to be close to Madoff, the guru, so that they could become part of his privileged community and join his elite group of clients. Madoff and other investment crooks tend to play on the mentality of exclusivity and use their charisma to draw in the wealthy who desire to part of the "club". Beware of snobbery and elitism
- Don't hesitate to ask your advisor questions about your investments. We're talking about your hard-earned savings hereâ€¦no question about the security of your assets should be off-limits.
- Remember the age old adage, "If it sounds too good to be true, it probably is." This saying never loses it's truth. It's like a law of the universe. The problem is that people really, really want to believe that they're somehow able to get 12% returns while others just aren't as fortunate. Reportedly Madoff claimed consistent annual returns of 10-12% with little volatility and no annual losses. Can you name any legitimate investor who can make that claim in recent years? Returns too far from the norm should be suspect.
Judith L. Seid, President and founder of Blue Summit Financial Group, Inc, is a certified financial planner who has actively used Socially Responsible Investing (SRI) for her clients since 1992. She firmly believes that "We can influence corporations to change their policies by avoiding investments in irresponsible companies and by seeking investments in companies with positive practices and products." Socially responsible investing (SRI) exists for investors looking to use the power of financial investment to create sustainable social change. For more information on Sustainable Investing, contact Judith at Blue Summit Financial Group in La Mesa, (619) 698-4330; www.BLUESUMMITINVEST.com