Bernie Madoff was far from the first and certainly won’t be the last investment advisor to drain his clients’ accounts. While it’s not advisable to keep your savings in a pillowcase under the bed, it’s also not a good idea to rely on financial advisors whose credentials you haven’t checked out thoroughly.
There are steps you can take to reduce the risk that you’re investing your money with someone who is either unqualified or outright dishonest.
In one recent case far from Wall Street, a Montana woman learned the hard way that what seems to be a golden opportunity can quickly turn to rust. According to the FBI, the woman was looking for legal and financial help in selling the family farm when a friend introduced her to Michael Van Auken, who claimed to be both an attorney and an accountant.
Van Auken, who the FBI says is neither an attorney nor an account, helped with the real estate transactions and soon earned the family’s trust. He eventually gained control of the family’s retirement account, amounting to about $700,000.
“He was a good talker and convinced them that he could manage it better and make more money for them,” said Special Agent Sara Sampson, who investigated the case, in a news release.
Van Auken told the family he planned to invent a new drill bit that would be lucrative for the oil fracking industry and said he’d invest some of their funds in it. Instead, he spent most of the family’s money in foreign currency exchange trading, an extremely risky activity sometimes compared to gambling. He also spent some of the funds on his personal living expenses, prosecutors said.
Client became suspicious
“He was essentially throwing this family’s money away, and they gave him more and more over time,” Sampson said. The client eventually became suspicious and contacted the FBI.
The family collectively lost more than $700,000. The impact was devastating. While the younger victims will have time to recover financially, the woman’s parents are now deceased, and they lost their entire retirement savings. They’d hoped to pass those funds on to their children and grandchildren.
Van Auken pleaded guilty in January 2020 to wire fraud, money laundering, and filing a false tax return. In May 2020, he was sentenced to 28 months in prison.
“The victims would say they weren’t trying to get rich. They were just trying to make good decisions, and they trusted someone who they thought would make good decisions,” Sampson said.
“The story of this case is that you can be careful, and it can still happen to you,” she said. “If it does, don’t be embarrassed—report it to law enforcement. It can happen to anyone, and it happens to a lot of people. If we can prevent the person from hurting someone else, we’ll do our best to do that.”
Exercise due diligence
How can you know a financial advisor is trustworthy? You have to do what big investors do before they commit their funds — exercise due diligence. Some steps are simple, like these:
- Deal with recognized firms. Some advisors work independently. That’s fine but if you’re just starting out, find an advisor who is part of a real firm, one with offices you can visit, one that has degrees on the wall and an established reputation.
- Meet the advisor in his or her office during business hours, when other people are around. You don’t want to find out years later that your “advisor” was a janitor who met his victims in the company offices after hours. Don’t laugh. It’s happened.
- Discuss the terms of engagement. Everyone needs to get paid. Does your advisor get paid by the financial products he recommends? Or does he charge you an annual fee based on the size of your portfolio (the more desirable method)?
- Look at the letters after the advisor’s name. You want to see CFP. It stands for Certified Financial Planner and it’s a hard credential to get. You can find a directory of advisors here. An accountant, MBA or attorney may be good at what they do but they’re not necessarily qualified financial advisors.
- Don’t rely on referrals from friends unless they’re Warren Buffett. That’s what the Montana family did and it’s what many of Bernie Madoff’s clients did. Referrals are OK but remember that unless your friends are truly self-made millionaires, they made not know whether they’re getting good advice or not. Use directories like the CFP’s and check financial magazines like Forbes. They have a ton of information, including frequent lists of outstanding advisors.
- Don’t put all your eggs in one basket. The Montana family put a lot of their money into the supposed fracking venture. Professionals never do this. At the most, set aside a few percent of your total portfolio for start-ups and long shots. Remember: most new businesses fail.
- Be realistic. A balanced portfolio may bring you 4% over time if you’re lucky. Plan accordingly.
There’s a lot more to say on this topic. Read as much as you can and invest for the long-term. There’s a saying that time in the market beats market-timing.