Question: I was scammed by a man who was a broker posing as a fiduciary. He put more than $100,000 of my retirement savings into worthless funds. I did not find a financial adviser who told me about FINRA until the statute of limitations (7 years) had passed. I made a report to FINRA, the Consumer Financial Protection Agency and finally the financial regulation department of Kentucky. I was lucky enough to speak to a warm human there who said they will be investigating him.
I don’t know any way I could have prevented myself from falling into this well-practiced scam. Do I have any recourse beyond the 7-year mark?What else can I do besides a background check on my current and future advisers to ensure this never happens again? (Looking for a new financial adviser too? This free tool can match you to a fiduciary adviser who may meet your needs.)
Have an issue with your financial adviser or looking for a new one? Email questions and concerns to picks@marketwatch.com.
Answer: We’re sorry to hear that you ended up in this position, and unfortunately, cases like these are more common than you’d think. “Only a small percentage of advisers are actual crooks but there are more than enough to harm many investors and destroy their faith in the profession,” says certified financial planner Jim Hemphill at TGS Financial. Furthermore, “some early career advisers don’t understand enough about investing to even recognize that what they are peddling is inappropriate for most investors.” That said, there are plenty of good financial advisers, but you need to know how to vet advisers and what to look for.
If you haven’t already, file a written complaint with FINRA and Kentucky Securities Division irrespective of the statute of limitations issue which is a civil process, not regulatory. The issue of the relationship between you and your adviser on a civil level is different than the regulatory laws established by the government and administrative agencies like the Federal Trade Commission. In your written complaints, include as many details as possible about what occurred along with your adviser’s information. You should also file a complaint with the broker’s employer.
Next, if you haven’t already, consult with an attorney who specializes in securities or investment fraud. “They should be able to guide legal action even beyond the 7-year statute of limitations,” says certified financial planner Joey Casolaro at Highland Financial Advisors.
It’s also possible that not all hope is lost. “Earlier this year, someone contacted me about an indexed security that another adviser sold them, a $1.8 million dollar transaction. It was fairly evident to me that it was an unsuitable investment recommendation and the account application which the client said had been completed by the broker had inaccurate information. Even though it was well beyond the look-back period, I wrote a letter on behalf of the client to both the broker and the issuing insurer and the broker said no way, but the insurance company agreed to give the client their money back if they signed a NDA and full release against them and the broker. No formal complaint will be recorded or reported,” says certified financial planner Mike Palmer at Ark Royal Wealth Management.
How to make sure this doesn’t happen again
If you want continued professional advice, you’ll eventually have to take a leap of faith. You can start by asking one or two advisers if they’d be open to a courtesy one-hour consultation just to help you get some perspective on your situation.
To find a more trustworthy adviser who is a fee-only adviser, meaning they’re only paid by the client and don’t receive compensation for selling or recommending products, search the National Association of Personal Financial Advisors (NAPFA). “All NAPFA advisers are fee-only and my experience of my NAPFA peers suggests they are generally experienced, ethical and well-credentialed,” says Hemphill. Other options for looking for advisers include Garrett Planning Network and CFP Board, or you can use this free tool can match you to a fiduciary adviser who may meet your needs
Look up the adviser on FINRA’s broker check website to see if they’re involved in any violations and to see the number of firms they’ve worked for because short employment history at many places could be a red flag, says Casolaro. Be sure to ask any adviser you want to hire these 15 questions.
“You might also look for an adviser who consults on an hourly basis. Staying with a fee-only adviser should reduce the chance of being taken advantage of,” says Hemphill.
Hourly fees vary by adviser but they typically charge between $150 and $450 per hour and clients can engage with them on an as-needed basis, instead of having an adviser who works under the assets under management (AUM) structure where an adviser collects a percentage of the client’s assets they manage.
Be sure to share your story with any advisers you’re interviewing and ask them how they can ensure the same thing won’t happen again. “Any adviser you work with should have an investment policy statement (IPS) that explains their investment philosophy and how your portfolio will be invested. This should be given to you in writing before your funds are invested and you can also ask any person you work with to put in writing that they’re a fiduciary,” says Casolaro. The reason you’ll want to work with a fiduciary is because they have a legal duty to act in the client’s best interest which limits the possibility for conflicts of interest.
A good rule of thumb for most individual investors is to avoid any investment that’s not immediately marketable every business day: “If your adviser does suggest such investments — and I’ve seen some that performed very well — they should never be more than 10% or 15% of your portfolio in total. Not per investment, in total for all non-liquid investments. If every individual investor only owned mutual funds and exchange traded funds, most fraud wouldn’t occur,” says Hemphill.
Have an issue with your financial adviser or looking for a new one? Email questions and concerns to picks@marketwatch.com.
Questions edited for brevity and clarity.
