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How to spot a crooked financial advisor

Warning signs to look out for. No one has a formula for beating the markets all the time.

Every year the media reports on numerous investment scams that have blown up and cost investors millions.

Many of the big ones are first exposed by Moneyweb and I am surprised by how angry the victims are with the journalist who is essentially helping them. Usually they are angry because they feel the scam-artists are being unfairly victimised. This dynamic clearly changes when reality bites and the investors have no more money.

Sadly it seems that the scam artists continue to lure people into their traps with sickening regularity.

I use the word ‘advisor’ in this column very loosely. Scam artists are obviously crooks but you might not be aware of this when you start working with a new advisor.

Here are some pointers to help you identify when someone might be trying to scam you.

1.Your advisor is selling an investment where the returns are high and very consistent in all market conditions

If you are being offered an investment that consistently grows at the same rate every year – irrespective of how the stock, bond or property markets are performing – you are probably invested in a Ponzi scheme. The only time that you should expect such consistent returns is when you are invested in a money market-type investment where your growth should be very similar to current interest rates.

In the current interest rate environment, if someone tells you they can give you 10% when most money markets are offering 6.5% to 7.5%, you should be very cautious.

2. You cannot get a proper statement from the product provider.

It is a great service if your advisor provides you with a consolidated statement of all your investments and financial products, but you should still be able to get a statement directly from the product provider. This should be on the product provider’s ‘letterhead’ and should state your name and your specific account number.

It is also a good sign if you can get online access to your statements via the product provider, but sometimes the international product providers are a bit backwards in this regard.

3. Your advisor has a secret formula or ‘black box’ that ensures he/she knows how to beat the market consistently

No one has a formula for beating the markets all the time. Hedge funds are proving fallible when compared with the index and unit trusts have the same issue. Any time you are trying to beat inflation with an investment, you are taking risks and these are going to cause you losses from time to time.

The best investors are only right 60% of the time and no formula or investment magic will do any better. It is particularly important to bear this in mind with people who trade based on algorithms that ‘predict’ the market.

4. Your advisor is vague on his/her commission or they earn double-digit commissions

With the property syndication scams we saw a few years ago, some brokers were earning 11% upfront commission. There is no way that this is sustainable and eventually this money comes from investors’ capital.

5. Guaranteed ‘interest rates’ that are more than double the current market rates

Remember that scheme that advertised guaranteed interest rates of 19% per year? These were guaranteed and were nearly four times higher than money market rates at the time. Sadly it blew up and the only losers were the investors…again.

 

How can you find a reputable advisor?

  • Look for a CFP® professional: you know they have studied financial planning at post graduate level and comply with a global ethical standard.
  • Go to fpi.co.za to find a CFP® professional in your area
  • Try to interview at least three different advisors before selecting one.
  • Is your advisor open and transparent about his or her remuneration?
  • Does your advisor deal with well-known product providers?
  • Is your advisor registered with the Financial Services Board (FSB)? This is a legal requirement and you can check to see if the person and the advisor’s employer are registered via the FSB’s website https://www.fsb.co.za/fais/search_fsp.htm

*Warren Ingram is a financial advisor at Galileo Capital.

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A crooked financial advisor is the one who offers you claims from intrinsically bankrupt institutions and who does not offer you the ultimate in financial safety: physical gold and silver.

So: all of them are crooked, playing along with the Ponzi game. But hey, as long as the music plays….

Ask them what they did before becoming a “financial advisor”. Steer clear of 2nd hand car sales men and bankrupt farmers, they seem to pop up as FA’s.

Also stay clear of retired teachers who think they are suitably qualified as financial advisers because of their rotten teaching skills.

Don’t believe it is only bankrupt financial institutions. It can also be your own bank who has given a “lead” to a “financial advisor” because you have a substantial balance in a money market account. This advisor is nothing but a commission earning broker who will offer you “better returns”. He will produce a graph showing that, over a very selected period which is post market downturn and pre market stagnation, with returns in excess of 10%. When you delve a bit deeper the “product” is merely a spread of unit trusts. So, for a healthy commission, he will transfer your money into a risky environment, which you could easily do without his help, and will offer no guarantees.
He does not even research the fact that you were employed by that bank for 30 years and are a pensioner of that institution. Financial Advisor – bah!

This is so 100% TRUE. Standard bank did this to me.
They send people who promise you at least twice the interest you currently earn. I met one of them, it turns out he is selling Stanlib unit trusts, that of course charges some 2 % upfront/introduction fees; and yes, it’s no longer interest that you’ll be earning but market returns.
On the other hand, I am happy with my low interest rate I earn as I get to sleep well at night.

A crooked financial advisor is ANY advisor that does not act in YOUR best interests. So, while Ponzi schemes are the extreme example, beware of “consultants” from the established insurance houses cold-calling you out of the blue. They act only in their own interests. I avoid anybody connected with Liberty as a matter of course.

@Warren, any chance of a follow up on the MMM “scheme” of the convicted Russian fraudster Mavrodi? Hanna (I think it was she) did an article last year, and until recently it appeared under MW’s “top read” but it has never been commented on as the article was “closed for comments” as soon as it appeared. I gather this guy is now using something like a bitcoin to perpetuate the scheme.

Warren, the formula for beating the markets all the time is very simple: buy low and sell high.

There should be more articles on this subject and the regulators should be doing more to warn the public too. I totally agree with Jonnoxx – avoid any investment via an insurance company, Liberty, Discovery, etc. For starters they’ll promote their own products and apply life insurance-type fees. They’re also salespeople who have commission targets to meet, so the client isn’t their first priority.

But the worst rogue advisers in the industry are those chasing UK pension transfer business (Qrops) and punting offshore retirement structures for South Africans. These solutions are massively miss sold with various tax, etc. benefits being claimed, which just aren’t true. Any “adviser” (unscrupulous and unqualified salesperson) from the following companies need to be avoided like the plague – deVere, Carrick, St James Global, Holborn, Prestige Wealth Solutions.

Could not agree more on the QROPS issues listed. The fact that this is still allowed to be marketed not only in SA, but globally, blows my mind. The companies you have listed, they have all been formed by ex-deVere employees, which tells you somethings.

Also the connection between deVere and Belvedere needs to be explored further. Those deVere salesman were switching clients QROPS funds into the Belvedere fund, which subsequently imploded. There was definitely a greater commission kickback for the salesman who placed clients monies in this fund – why else was it so strongly supported.

That’s exactly right and this, together with all their other crooked practices, the FSB have been well aware of for many years. Belvedere was a very integral part of the deVere global network until 3 years ago and they should be exposed and shut down together. Both are being very heavily investigated by the FSB and the sheer weight of clear, factual evidence against them should bring about their demise. The sooner the better! The other companies promoting offshore Qrops should all follow thereafter.

I crooked financial adviser can be spotted as follows:

1. All ‘his’ products have very high return (but normally conveniently over past 3-5 years missing the impact of the great recession);
2. Hidden complexity: either his fees or even the way the product is managing to generate abnormal returns;
3. You are made to belief that your are stupid not being able to understand what he is explaining.

My simple rule that served me very well: I will not buy any product that i do not fully understand (maths behind investments are dead simple and no reason to make this complex).

Counterparty risk : you give your money to company A then the existence of your investment is dependent on the well-being of company A. Company A gone: investment gone.

The financial industry is bankrupt and kept upright for the time being with taxpayers money. Until….

You can have a million of these articles but people will still never learn. We will unfortunately continue to hear about more and more complex schemes

Remember, a lot of these ponzi schemes are introduced via friends or family. Unless your friends or family have long track records as financial advisors, don’t listen. I’m not going to go to a mechanic for IT support, why should it be any different?

Bottom line for any investor? Maintain your objective, be realistic, and most importantly don’t be greedy! If anyone guarantees your money back and with huge returns over a short period of time.. well they are most likely lying.

What are the minimum qualifications to become a financial advisor?

Yes. We have been taken in by our then Financial Advisor. He gained our trust over a few years before approaching us with an investment with high returns. He drew up a contract stating that he borrowed the money from us, that there was no risk involved and interest would be paid on top of the capital borrowed There was no mention of investment in the contract and he gave a personal guarantee in the form of a Momentum Policy. The money was supposed to be paid out to us over a year ago. After months of lying to us we no longer hear from him. I have recently discovered that the policy held by Momentum which was his PERSONAL GUARANtEE does not belong to him but to another of his clients. I guess we could open a criminal case against him as he is guilty of Fraud and Identity Theft but that will take years to go through the courts. Any other suggestion to get our money back from this crook?

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