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Caveat Investor

Posted May 1, 2004 by David Hamra

The recent mutual fund scandals have left many of us very confused about what to do. The actual damage done by late trading and market timing is extremely difficult to quantify, and most people don’t understand even the legitimate costs associated with mutual funds. Investors are left to decide whether they want to continue to do business with firms that have, to various degrees, abdicated their fiduciary obligation for their own financial gain.

As a practical matter, the individuals with whom investors deal directly have as great an impact on the overall investment experience as does the larger firm. But even these more personal relationships are not immune from peril. Consider these examples of improper conduct from a recent bi-monthly release by NASD Regulation, the regulatory arm that polices brokerage firms and brokers for violations of NASD rules and securities laws.

  • Selling unregistered securities and withholding material facts
  • Sending false account statements
  • Unauthorized transactions on client accounts
  • Forged documents or customer signatures to purchase insurance policies, transfer money or transfer accounts
  • Multiple instances of converting client funds for the brokers’ personal use
  • Misleading sales tactics
  • Selling inappropriate, high-cost classes of mutual fund shares
  • Selling investments that had no legitimate investment purpose

It’s reasonable to rely on a professional for guidance through the complex world of investment products. That doesn’t mean, though, that you should blindly hand over your hard-earned money, so here are some simple ways to protect yourself.

Do a background check – For brokers, employment history, complaints, investigations and other information is available through the NASD at www.nasdr.com/2001.asp. For registered investment advisers, their Form ADV provides similar information. These sources may not include all the information you’d like, but they are a great first step.

Understand the relationship – Most people have preconceptions about how their investment relationship should work but never confirm these notions with their advisor, often out of embarrassment. Leaving these matters to assumption can be very costly. Take pains to understand the exact services being provided, the degree of control or discretion you have given away and the level of communication you can expect.

Follow the money – Investment professionals deserve to get paid, and there are a number of legitimate compensation methods. It is only natural that the professional would be more motivated by actions or products that pay more generously. Know how your professional gets paid so you can recognize any potential conflicts of interest.

Receive independent statements – The worst abuses usually involve altered account statements that hide the offenses. Be sure that statements come directly from the firm’s central administrative offices without passing through the local office. This will prevent any “doctoring”.

Review your statements – Investment statements can be notoriously difficult to understand, but there are often summaries that provide vital information. Confirm that any money going out of the account was properly authorized and confirm that investment transactions are within the terms of the relationship as you understand it. Immediately call your professional if you have any concern that the activity was improper, and have no reservations about going to the next level of supervision in the firm if you are not satisfied with the response.

Beware the “special deal” – Remember the oft-repeated warning that if you are offered a “unique, special” investment that promises high returns with little risk, run the other way. It is likely that your advisor is pursuing his own interests rather than yours.

Don’t be intimidated – The overwhelming majority of investment professionals are honest and will do their best to help you. But the terminology and practices of investments are confusing, and firms often have their own unique lingo and techniques. Above all, be persistent in asking questions until you get answers in terms that you can understand. After all, it’s your money and you are paying the professional to work for you.

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Gordian Advisors Financial Planner

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Gordian Advisors may only transact business or render personalized investment advice in those states where we are registered, or have filed notice, or are otherwise excluded or exempted from registration requirements. Material discussed is meant for general illustration and/or informational purposes only, and is not to be construed as investment advice. Nothing on this web-site should be interpreted to state or imply that past results are an indication of future performance. Although this information has been gathered from sources believed to be reliable, please note that individual situations may vary. Therefore, any information should be relied upon only when coordinated with individual professional advice.