Every day an article can be found about an investor making basic mistakes with their finances and in some cases these mistakes cost the investor nearly all their life savings. Often these mistakes can be spotted by a friend or family member, had they learned of it early on.
One recent case in point: a retired widow in her 70’s had most of her $700,000 portfolio put into one stock, Rite Aid, which suffered large losses when its takeover failed. Her advisor is being charged by the Securities Exchange Commission (SEC) for breaching his fiduciary duty and for fraud, and the firm employing the advisor was also pursued by the SEC and settled the case and paid penalties for failing to supervise the advisor, among other charges.
For those in the wealth management industry and even for a somewhat sophisticated investor, these kinds of mistakes and misdeeds are easy to spot. If friends, colleagues and family members engaged in casual dialog about investing more often, the basics would be missed less.
Here are a few easy topics to discuss with just about anyone:
- Have you looked at your advisors’ regulatory record?
Everyone should review the regulatory record of the advisor at least annually. It serves two purposes: one, you have peace of mind that they are indeed registered and not a fake. Two, if they have a negative history with regulators, that is vital to understand.
- Are you invested in at least 10 different securities?
Like the widow example above, lack of diversification is a huge risk. Shockingly, people still make the basic mistake of putting all their eggs in one basket.
- Is your advisor and the custodian (bank) of your securities different organizations?
This mistake is partly how the fabulously wealthy gotten taken in by Bernard Madoff, the perpetrator of the world’s largest financial fraud. Your advisor and your cash and stocks should be with two different, unrelated companies, unless it’s an old, household name like Merrill, Schwab, Morgan, Fidelity, etc.
- Has your advisor guaranteed your returns or principal?
As the saying goes “Nothing in life is guaranteed”, the exception being certain kinds of insurance contracts, but the broad message is if someone tells you their returns or underlying investment is guaranteed, red flags should be going off.
Investor education is however, slowly going in the right direction. TV actor, and “Black-ish” star Anthony Anderson and his mother partnered with Northwestern Mutual recently to explain the benefits of financial planning, which was detailed on Yahoo finance news. Real world examples from known personalities absolutely speed investor education.
However, the most impactful way to help others avoid basic investing mistakes, as well as avoid fraud, is to have simple and regular conversations with friends and family. Make no mistake, the majority of people do not like discussing their money and there is a long list of psychological reasons why we avoid the topic.
All it takes on the other hand, is one person to ask the right question to help a friend avoid disaster. If we each engage our circle of friends and family, we certainly will see a reduction in these mistakes.
www.MyPerfectFinancialAdvisor.com is the premier matchmaker between investors and advisors using personalized data, proprietary algorithms, and deep industry experience.