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In my last blog I discussed the safety of investment custodians such as Fidelity and Schwab, after I received a concerned email from a client.  After watching Jon Corzine, the former CEO of MF Global, trying to explain how $1.2 billion was missing from their clients’ brokerage accounts, he was worried about his own.
The next important question to ask is whether you can trust your advisor.  Research indicates most investors believe their advisor is very trustworthy, even if the evidence shows otherwise.  It’s great to have an advisor you feel you can trust, as long as that trust is backed up by checks and balances, facts and reality.  Investment scams seem so obvious after they’ve been exposed, but most of those affected weren’t suspicious of their advisor until it was too late.
Investors disappointed in their returns over the past decade are more likely to be taken in by what appears to be a chance to make great returns.  Tough investment markets bring out the emotions of fear and greed, and make people more vulnerable.  Based on my study of advisors and investment scams, if your current advisor exhibits one or more of the following characteristics, you should be very concerned:

1.      There is no independent accounting of individual investment holdings, portfolio account balances or returns.  As a former KPMG auditor, this one is so obvious to me it’s frustrating.  However, it’s been ignored by everyone from the very wealthy to low income individuals. Bernie Madoff was able to report consistently positive, long-term investment returns because he was the one preparing the reports, and we all know how that turned out.   

But here in Cincinnati we have our own example as well.  In February 2001 Stephen G. Donahue, owner of SG Donahue Securities, was found guilty of taking over $6 million from nearly 250 clients by supposedly investing their money in a tax free bond fund that never existed.  Instead, he used the money to pay his personal taxes, buy a condo in Florida, and cover other personal expenses.  The theft was hidden because the company did not use an independent custodian like Fidelity to report on client holdings.  Instead, statements were prepared internally and mailed to clients by the SG Donahue Company.       

2.      They guarantee investment returns. Registered Investment advisors like The Asset Advisory Group are barred from using the word “guaranteed” when we discuss investment performance with current or potential clients.  The Firefighters’ Retirement System of Louisiana, along with two other Louisiana pension funds, is now trying to recover a combined $100 million they have invested with Fletcher Asset Management, which had guaranteed a 12% minimum annual return. Their withdrawal requests have been met with only IOUs at this point.  The FBI and SEC are currently investigating, so this story may just be getting started.   

Our local example is George Fiorini and the 10% Income Plus Plan. His investment scam was first brought to my attention in 1995 by my administrative assistant, who gave me a mailing she received that was also circulating among her retired friends. Fiorini’s advertisements were on radio, TV, and bus benches, and featured local celebrity Bob Braun as his chief spokesman.  Over 170 investors lost $5 million, most of whom could not afford to lose anything.    

3.      They report returns that are significantly higher than market conditions would indicate. Bernie Madoff was able to deliver consistently positive investment returns for decades while S&P 500 returns were negative, but if you questioned the validity of the returns, he returned your money and fired you as a client.  This worked until too many people asked to cash out.  Allen Stanford, CEO of Stanford Investment Bank, reported returns of 15% or more on the bank’s high rate CDs, until the SEC decided to investigate after Bernie Madoff’s Ponzi scheme unraveled.  Remember Home State Savings Bank’s higher than market CD rates here in Cincinnati? 

A December 27th Wall Street Journal article, SEC Ups Game to Find Rogue Firms, indicates that the SEC is finally wising up and using performance data to screen out investment management firms to investigate.  They have announced four civil-fraud cases so far as a result. 

4.      They use wealth, connections to the rich and famous, or exclusivity to give them credibility.  George Fiorini would show up for meetings in a chauffeured black limousine.  Allen Stanford sponsored cricket teams in the West Indies, and his friend pro golfer Vijay Singh promoted Stanford’s company by wearing the firm’s logo on his apparel and golf bag.

The aura of exclusivity was used to promote Ben-Mar Investments in the early 1990’s in Cincinnati.  Ben Schmidt and Mark Gatch used country club connections and their relationships with Bengal players to promote an investment fund that supposedly used a sophisticated investment strategy in which only a select few could participate. Investors lost over $17 million.   John Brinker defrauded 600 greater Cincinnati investors of about $20.3 million using Wellington Capital Holdings, a fictitious offshore investment bank that promised 100% returns through exclusive investment opportunities.   

5.      They use religion or other affiliations to build trust.  George Fiorini would begin meetings with a prayer, and named one of his investment companies IGW Trust (In God We Trust).  Over $2.2 billion was taken from investors through the Baptist Foundation of Arizona, IRM Corp. used face-to-face recruiting through church-based organizations to solicit over $400 million, and Greater Ministries International promoted “Christian Social Security” to take $580 million from investors.  Deep religious beliefs are admirable, but they should not be the primary reason to invest with an advisor.     
After reading all the horror stories you might begin to wonder if you can trust anyone.  But you can build wealth, and maintain it, by working with an advisor who tells you the truth vs. telling you what you want to hear.   

Jeannette A. Jones, CPA, CFP®