Intelligent Design

John McMillen | Portfolio Manager

Learn what matters - and what doesn't - when building a sound investment strategy.

Protecting Your Assets From Unscrupulous Advisors

February 2009

I typically write on topics pertaining to portfolio construction and how embracing widely accepted investment theories such as Modern Portfolio Theory and Efficient Market Hypothesis can go a long way in protecting investors from needlessly assuming excessive risk. Given the current market environment, however, I feel compelled to touch on some basic principles outside of investment theory that can also go along way in helping you protect your wealth.

Given the high profile misdeeds recently of certain individuals in the investment industry like Bernie Madoff and Marcus Schrenker (who allegedly tried to fake his own death by jumping out of a plane), investors are rightfully anxious about making sure they are working with a trustworthy and reputable advisor. Thankfully there are a few simple rules of thumb all investors can follow that will greatly minimize their risk of being victimized by an unscrupulous con artist masquerading as an investment advisor.

First, there is the old adage, “If it’s too good to be true, it probably is.” This may seem like a cliché, but it certainly eluded those who invested billions of dollars with Bernie Madoff. The fact is that excess returns above T-bills are only generated by assuming risk. If someone offers you a great return with no risk, rest assured – intentionally or unintentionally – they are not sharing with you the whole picture.

Second, demand transparency. All too often financial mismanagement or fraud is committed by taking advantage of a client’s trust and keeping them in the dark. Demand to know exactly what you are paying; demand to receive monthly statements showing all transactions; demand to know what you are invested in and where it is being held; and, demand for this to come from a third party. You may hear many excuses why this may not be offered, but none supersedes your right to know how and where your money is being invested. If an advisor is not willing to meet this standard of transparency, walk away.

Third, make sure you are dealing with a qualified individual or team of individuals. Look for firms that have professionals with the CFA, CFP and/or CPA designations on staff. All three of these designations have very high professional and ethical standards that must be abided by, and because they are difficult to obtain they tend to work as a screening mechanism. To be clear, this does not imply you will have superior investment results, only that the individual has obtained a certain level of competency, something that should not be overlooked given the investment industry’s low barrier to entry.

In addition, credential inflation is very pervasive in the investment community. There are many meaningless designations that investment product providers create that look similar to the CFA, CFP or CPA designations, but that are actually merely “window dressing” intended to give their sales agents the appearance of credibility. Legitimate experience and achievement is not overrated and a lack of it should be questioned.

By no means is this a complete list, and following it does not guarantee you will have a flawless investment experience; however, it will help minimize the probability of your hard earned wealth being mismanaged. There are many competent and honest advisors out there, and with a little prudence and willingness to investigate, investors can easily find them.

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