Financial advisers are one of the most important components of your team when you prepare yourself for what lies ahead. You are not only trusting them with your current finances but essentially putting your future in their hands. Unfortunately, not all financial advisors end up being trustworthy individuals.
Meet Gaylen Rust – or rather, you don’t want to meet him
Gaylen Rust was a well-known businessman in the city of Layton, Utah. He carried on the family legacy, running a coin shop his father had started in the mid-60s. With his success, he also founded the Legacy Music Alliance, a charity designed to fund school art programs. He was even honored on The Salt Lake Tribune, being referred to as the state of Utah’s main proponent of arts education.
Unfortunately, according to federal and state overseers, Rust was also running a Ponzi scheme. The SEC filed civil suits along with other entities alleging that he bilked customers and associates out of more than $200 Million in a bogus silver trading pool.
What is affinity fraud?
Affinity fraud is a term used when scam artists will target people that they can find common ground with or whom they know. This could be friends, family and co-workers or members of the same religion or community group. This is what happened with Rust who himself, along with his family, targeted people they knew to perpetrate the theft. This is also a problem that occurs when people choose their financial advisor based on word-of-mouth recommendations. That doesn’t mean you can’t look at financial advisors recommended by friend and family, but it is essential to watch for red flags and to perform your own independent research.
Red flags that a financial advisor may not be what they appear
Proper research is key when choosing a financial advisor, and the best place to start is being aware of possible red flags that you should send you running in the opposite direction. Some red flags to consider include financial advisors who:
- Are not properly registered in the securities industry.
- Consistently claim to have much higher returns than the norm; often with averages around 20% and dipping no lower than 12%.
- Provide spreadsheets showing transactions, instead of proper account statements issued by a third party, like a brokerage company.
- Say they can guarantee high returns with no risk.
Always do your due diligence
One of your primary responsibilities is doing your due diligence to properly research an advisor before you decide to trust them. First, check their histories. Even legitimate advisors may not have a clean record. Some may even have charges for serious misconduct such as fraud, forgery or unauthorized trading in their histories. Unfortunately, those who have engaged in misconduct may be likely to do it again, so it is best to steer clear. Two other important parts of your research should be:
- Make sure they are properly registered – Your financial advisor will need to have the proper registration, which could be as either an investment adviser or a broker/dealer. There are plenty of free online tools to check registrations such as BrokerCheck or the Investment Advisor Public Disclosure datable. Once you have seen that they are properly registered, you will also be able to see both their employment and disciplinary history.
- Make sure they have the right credentials – Anyone who offers you advice on how to invest or manage your money should have credentials that show they have had a proper financial education and bind themselves by the required code of ethics. Two of the most common credentials to look for are certifications as a certified financial planner or a certified financial analyst.
Choosing a financial adviser to trust with your money and your future can seem like a daunting task. You need to make sure to do proper research instead of relying on word-of-mouth referrals to prevent yourself from falling victims to scam artists and ensuring that you end up with a financial advisor you can trust.