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Paperwork that Could Clue You into a Scam

Today I read an article about a financial adviser whose husband, also a financial adviser, had been scamming his clients for over 20 years and she never knew! Of course, looking back she realized there were some red flags that should have alerted her to the situation.  These are the three things she observed:
  • Red Flag 1: His clients' portfolios enjoyed consistently good returns even when the market was performing poorly.(This is not impossible but very unlikely to occur).
  • Red Flag 2: He did not provide his clients with detailed trade confirmations for buys or sells.
  • Red Flag 3: He instructed his clients to make checks deposited to their accounts for investments payable to HIS firm rather than the custodian firm that actually held the investments. I will explain more about the roles of advisers, custodians and brokerage firms in future posts.

In an article on CBS MoneyWatch, she offers advice on what to do if you spot any of these red flags with your adviser. Click here to read the article (keep in mind that in this article she creates more questions than she answers, quite possibly as a way to promote the sales of her book.  You can learn more about the terms and concepts she discusses through free research online).

I want to address red flag 2, no detailed trade confirmations provided to the clients for trades.  When you or your adviser places trades in your investment account (brokerage, mutual fund, IRA, etc.), you will receive a trade confirmation of the transaction detailing such things as the name of the investment you purchased or sold, quantity of shares or bonds, price paid or received per share/bond, commission paid, etc. A trade confirmation is essential for responsible investing for two reasons:

  1. Verification that the broker has filled your order according to your instructions - carefully review the document for accuracy and report any errors to your adviser as soon as possible so corrections can be made. If you wait to long to point out irregularities in the transaction, you could lose the ability to rectify the situation.
  2. Documentation for taxes and gains/losses tracking - account statements do not contain sufficient details to support your declaration of gains or losses.  The IRS requires a valid trade confirmation as proof of the buy or sell transaction.  This confirmation can be on paper or electronic (a method many brokers now utilize to minimize paperwork you must maintain.  Be sure you keep a backup of the electronic files). 
For those of you not familiar with my philosophy of personal finance, I believe we are all responsible for our own money decisions.  Anyone who takes responsibility for their financial well-being understands that attention to detail, education and a bit of skepticism go a long way to putting one on the path to personal finance success.  If something seems too good to be is!  If something seems a bit off or is!  If a financial adviser's style or recommendations rub you the wrong are probably wise to find a new adviser.


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