cfpboard financial self-defense guide

8/8/2019 CFPBoard Financial Self-Defense Guide

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Cnsume Guide t

Finncil Self-Defense

W y kw rf

CFP BoarDS

Reviewed by Federal Citizen Inormation Center, U.S. General Services Administration


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Welcome

It should surprise no one that Certiied Financial Planner Board o Standards,

Inc.whose core mission is to serve the publicwould publish a sel-

deense guide.

At CFP Board, we take the responsibility to protect American savers and inves-

tors very seriously. It is why we insist that CERTIFIED FINANCIAL PLANNER

proessionals adhere to a iduciary standard o care, which requires them to put

the interests o the client irst. It is also why we uphold the CFP certiication as

the standard o excellence or personal inancial planning.

As the CEO o CFP Board, I have ound recent events particularly disturbing.

Fraud and mismanagement by inancial proessionals have undermined con-

sumer conidence. CFP Board is in an ideal position to advance the protection

o consumers rom raudulent, unethical practices that can put their inancial

utures at risk.

CFP Boards consumer advocate, Eleanor Blayney, CFP, has written this guide

as a irst line o deense or consumers who may be vulnerable to the minorityo inancial advisors who do not practice according to the highest ethical stan-

dards. It is written in dedication to those who have been hurt by, or victims o,

inancial raud and mismanagement.

In these pages, CFP Boards consumer advocate alerts consumers to some o

the common behaviors that warn o raudulent or unethical practices on the

part o a inancial advisor. She describes these red lags and their potential

consequences, lists the things that consumers should do to protect themselves,

and provides inormation on how to ile an oicial complaint i unethical or in-

competent practices are suspected. I encourage you to use this guide as a tool

to protect yoursel and your loved ones.

This guide, however, is just a starting point. To truly protect your inancial

status, seek the advice o an advisor who will put your interests irst. A list o

CERTIFIED FINANCIAL PLANNER proessionals in your area is available on CFP

Boards Web site (www.CFP.net). The site also oers a wealth o inancial plan-

ning inormation speciically designed to protect and educate consumers.

I wish you success in your pursuit o inancial well-being.

Kevin R. Keller, CAE

CEO, CFP Board


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caution: Red Flags ahead

Check the news on any given day, and youll likely run across another sad

tale o inancial raud. Even the most sophisticated investors can all prey

to it, as the Bernie Mado saga clearly demonstrates.

But you dont have to run in Mados circles to encounter inancial abuse. A

2009 survey o CERTIFIED FINANCIAL PLANNER proessionals ound that:

60% o respondents knew a consumer who had experienced

raud or abuse at the hands o another advisor.

The most likely targets o inancial raud or abuse were senior

citizens, aged 61-75. (According to the Elder Financial Planning

Network, seniors have lost $2.6 billion to inancial mismanage-

ment or abuse.)

These numbers leave us with serious questions. Whom can we trust? Where

do we turn or guidance? What red lags can warn us o potential trouble?

Thats why CFP Board has produced this Consumer Guide to Financial Sel-Deense. Here youll ind a series o red lags, taken rom a CFP Board

survey o situations reported by CFP proessionals where a consumer had

been taken advantage o by a inancial advisor. Each o these red lags:

Identiies a common situation where consumers may

be victimized.

Describes the warning signs o raud or abuse.

Shares real-lie situations in which consumers were abused.

Shows you what you can do to protect yoursel.

CFP Board is in a unique position to oer this booklet. As an organiza-

tion created to serve the public, CFP Board holds CERTIFIED FINANCIAL

PLANNER proessionals to rigorous ethical standards that put the clients

interest irst and oremost.

You can protect yoursel rom shady operators. Use the tips in this booklet

as your irst line o deense.

Eleanor Blayney, CFP

Consumer Advocate, CFP Board

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2

did You KnoW?

60% o CFP certiicants know a victim

o raud or abuse at the hands o

another advisor.

Source: CFP Board 2009 and 2010 Surveys

Weve known

him orever.

Im sure you can

trust him.


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YouR selF-deFense moves

Ask your advisor to provide services with the duty o care o a iducia-

ry. This obligates them to base their recommendations on the clients

best interests, ully disclosing any conlicts o interest (actual, potential,

or perceived). I the advisor avoids the question or doesnt understand

the term, go elsewhere.

Trust, but always veriy. You cant board a plane without veriying your

identity and passing security checks. With your very livelihood and u-

ture security at stake, you cant aord to hire a inancial advisor with-

out a background check.

Ask your prospective advisor to identiy the organizations that license

or supervise him. Brokers are regulated by FINRA; investment advisors

by either the SEC or a state securities regulator; insurance agents by the

state insurance commission in states in which they do business; CFP

proessionals by CFP Board. Use these organizations Web sites to check

the advisors background and disciplinary history, i any. (See the reer-

ence list at the back o this guide or links to these organizations.)

spot the Red Flag

An advisor raudulently claiming to be a CERTIFIED FINANCIAL PLAN-

NER proessional holds a power o attorney or a clients account and

steals $1 million.

An advisor gets business by claiming to be retired military, a CFP

pro-essional, and even a Director o the CFP Boards Board o Directors. Cli-

ents discover that none o these claims are legitimate only ater theyve

been taken advantage o.

Maybe hes lived next door or years. Perhaps your kids play together, you gol in the

same oursome, or a close riend recommended him. Whatever the details, he claims

to be a inancial advisor. Why not just go with him?

To be sure, you want an advisor you can trust. But knowing someone as a person

doesnt mean you know him as an advisor. People take it on aith that the advisor is

who he appears to bethat the credentials on his business card are legitimate. Yet

blind trust oten begets disaster.

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do YouR homeWoRK


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4

Just sign here.

Ill take care o

the rest.

did You KnoW?

Never sign any loan documents that

contain blanks. This leaves you

vulnerable to raud.

Source: FBI Financial Crimes Report to the

Public, FY 2009


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Financial planning involves a lot o paperwork. To make the process easier, many advi-

sors oer to complete the orms or you, using the inormation they have on ile. But

that can lead to trouble. Any advisor can get your inormation wrong; an unethical

advisor might alsiy data. Either situation can invalidate your contract.


Regardless o the paperwork burden, do not leave blanks that someone

else could ill in without your knowledge or consent.

Ask your advisor to send you copies o the inal, submitted documents.

These should be clearly marked with the word inal (or as submitted)

and the date the document was completed. That gives you hard evi-

dence should a discrepancy arise later.

spot the Red FlagAn advisor ills out an investor proile or a client. The proile incor-

rectly describes the client as eligible or an investment. As a result o

the misinormation in the proile, the client was put into an investment

that was not suitable or the clients income or net worth. When the

investment proved to be worthless, the loss was particularly damaging

to the client.

An advisor completes a orm to roll over his clients retirement plan to

an IRA. The advisor incorrectly describes the client as no longer work-

ing or the employer who set up the plan. The mistake renders the

transer ineligible or rollover, and the client may be required to pay

income tax on the account balance.

While illing out a lie insurance application, an advisor asserts that his

client has no history o alcohol abuse, even though her driving record

includes an alcohol-related charge. When the client dies in a car acci-

dent, the insurance company discovers the alse statement and reuses

to pay beneits to her beneiciaries.

RedFlag2

Fill in all the blanKs


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6

This is just or my

special clients.

did You KnoW?

There are no secret markets in which

banks trade securities. Representations

to the contrary are raudulent.

Source: US Treasury Department, 2010


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Ask your advisor to veriyin writingthat his employer or company

supervises the investment.

Ask the employer or company directly whether it approves and super-

vises the investment.

I your advisor is a sole practitioner, veriy that she carries proessional

liability insurance.

Remember that investments should always be regulated or super-

vised by third parties, with the risks and possible conlicts o interest

ully disclosed.

spot the Red Flag

A broker uses the logo and guarantee o his ormer employer, an

insurance company, to sell a tax-ree corporate bond returning 32% a

year. (I the mention o a ormer employer doesnt send up red lags,

the promise o a 32% return on a tax-ree corporate bond should!)

An advisor sells away an interest in a private partnership to a client.

The client loses her $4 million and has no recourse to sue the employer.

An advisor oers a client an opportunity to earn a preerred inter-

est rate. The catch: the opportunity involves lending money to the

advisor himsel.

Your advisor presents you with a private or exclusive investment opportunity. Her

letter looks dierent somehow: maybe its not on her employers stationery, or it even

bears the logo o another company. And though youve always done business at her

oice, this time she asks you to meet at a local ca.

Look out. Your advisor could be selling awayoering you an opportunity that her

employer does not know about or supervise. That could hurt you in two ways: not only

could your money be going into unsuitable or raudulent investments, but i they dont

work out, you may have no legal recourse against the employer.

beWaRe oF Rogue advisoRs


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8

Ill send you

all the investment

reports.

did You KnoW?

Thirty million Americans ages 18 and

older, or 13.5% o the U.S. adult

population, were victims o consumer

raud during a one year period.

Source: Federal Trade Commissions Fraud

Forum, 2009


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maKe suRe it all adds up

What i your advisors reports are the only reports you get? Even worse, what i you

receive no regular reports at all? This happened to Bernie Mados clients, and we

know how that turned out. Mados reports showed account balances that had long

since disappeared into his boats, mansions, and cars.

spot the Red FlagAn advisor asks a 71-year-old woman to transer accounts to his new

irm. From then on, she receives no statements showing her accounts

or the value o her investments.

A client receives statements only rom his advisor. Later, he is horriied

to learn that the advisor is going to prison or raud.

An advisor accepts money rom a client or a speciic investment, but

the client never receives written conirmation o the investment pur-chase. The advisor is later ound guilty o running a Ponzi scheme.


Make sure you receive regular statements rom independent third-party

sources. Usually, these sources are the custodians o your assetseither

a brokerage irm or a trust company. Reconcile the statements with re-

ports you receive rom your advisor, and ask about any discrepancies.

I you invest in limited partnerships, real estate, or non-traded securi-

tiesany investment not valued requently or held by a separate cus-

todianveriy that the investment manager is audited annually by a

reputable independent accounting irm.


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Never make a check payable to an advisor. Never leave the payee line

blank. I you pay a ee or the advisors services, always make the check

payable to the advisors business.

Reuse any request or a personal loan.

Question any situation that gives an advisor unlimited access to money

intended or investment (or money actually invested). That includes giv-

ing the advisor a ull power o attorney or your accounts.

Youve met with an advisor, liked what you heard, and decided to buy a inancial prod-

uct. Then, when you get out your checkbook, the advisor says, Just make it payable

to me. Ill make sure it gets invested. Or he tells you to leave the payee line blank. At

best its unethical. At worst its raud.

spot the Red FlagAn advisor deposits a clients check, made payable to himsel, into his

own account or his own use. He then issues raudulent statements,

leading the client to believe that the unds have been invested.

An advisor talks a client into lending her money. Later she declares

bankruptcy, and the client has little chance o collecting the debt.

An advisor persuades a client to give him $100,000 or an advanced

premium deposit und that will pay o her $2 million lie insurance

policy. When the client asks or her money back, she discovers that the

advisor is using the unds or his own purposes.

dont give aWaY the KeYs


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I know its

a difcult time,

but you need

to decide.

did You KnoW?

When the economy alters, its a prime

time or scams. Con artists target

people who are desperate or quick

help with their money problems.

Source: Consumers Union, July 14, 2009


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Be suspicious o pressure tactics or sales pitches during a major lie

change. Its best not to make important decisions or at least a year or

two ater a personal loss.

Find an advocatea trusted amily member or riendto help you

with truly urgent matters, such as meeting tax or reporting deadlines.

spot the Red Flag

An advisor convinces a recent widow to invest her $350,000 death ben-

eit in a variable lie insurance policy. Her greatest need, however, is not

insurance but cashcash thats now tied up in the insurance policy.

A victim o Hurricane Katrina receives a loan rom the Small Business

Administration to rebuild his business. An advisor presses him to pur-

chase an annuity with the unds insteadan annuity he cant touch or

10 years without signiicant surrender ees.

A woman visits the local uneral home to make arrangements or her

mothers uneral. An advisor meets her there with paperwork to move

the mothers investments to the bank he represents. Only later does

the woman discover that he not only moved the investments, but sold

them without her knowledge.

Your lie has turned upside down. Perhaps youve lost a spouse, are going through a

diicult divorce, or lost your home. In the ace o events like these, we oten eel vul-

nerable and lack perspectivenot the best time to make big decisions. Unscrupulous

advisors know this and may swoop in with opportunities, pressing you or a decision

beore you can think straight.

step bacK


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This ones a

no-brainer.

You cant lose.

did You KnoW?

An analysis o Mados returns versus

the S&P 500, showed that he only had

three down months versus the markets

26 down months during the same

period, with a worst down month o

only 1.44% versus the markets worse

down month 14.58%.

Source: SEC investigation report againstMadoff, August 31, 2009


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When your advisor recommends a und, insurance contract, or retire-

ment strategy, listen careully or a air, complete discussion o the pros

and cons. Write them down. I youre hearing only pros, youre not

getting the ull story.

Ask the advisor under what circumstances the investment will not per-

orm as projected. Consider economic eventssuch as inlation or ris-

ing interest ratesas well as your personal circumstances. What hap-

pens i you need money or an unexpected event? What happens i you

die early or outlive the income stream?

Make sure the advisor ocuses on your speciic needs as much as on

the investment.

Ask or a description o the investment in writing, with a clear state-

ment o its beneits and risks. In this document, youll see that such

words asalways, guaranteed, and completelyare absent, even i

they were used requently in the verbal presentation.

spot the Red Flag

An advisor consistently sells variable annuities to seniors with the promise

o no loss o the unds invested and a high return. Seniors hear all the

advantagesan income stream they cant outlive, guaranteed death bene-

its, high yieldand sign up. The advisor, however, doesnt tell them about

the steep surrender charges and limited options or distribution. More o-

ten than not, the annuity turns out to be a bad it or the investor.

No risk, high return. I it sounds too good to be true, thats because it is. A undamen-

tal principle o investing is theres no ree lunch. I an advisor tells you otherwise,

take your business elsewhere.

looK FoR the doWnside


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This oer is good

or today only.

did You KnoW?

The Scarcity Tactic, or implying that

something is rare or scarce, is one o

the most common persuasion tactics

used in investment raud.

Source: Outsmarting Investment Fraud by

the SEC, AARP and FINRA


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Give yoursel plenty o time to mull over an investment beore you de-

cide. Dont act until you ully understand what is being oered.

Speak up when you eel pressured. Any eeling o pressure is reason

enough to delay making a decision.

Know how the advisor earns her pay, and consider this as you evaluate

her advice. An advisor who practices as a iduciary will disclose upront

whether her compensation is tied to a speciic product or recommen-dation. I she doesnt mention how she is paid, ask.

Use your ree look period. Contracts or insurance policies and an-

nuities oten give you this periodusually 30 daysduring which you

can back out without incurring penalties.

spot the Red Flag

An advisor visits her clients at home, seeking a signature or a check.

Ethical advisors may also make home visits, but only or the convenience

o clients; unethical advisors invade the clients personal space to gain

an emotional advantage. (One client, visited six times by a persistent

advisor, considered signing the deal as a way to make the visits stop.)

An advisor invites clients to a ree dinner and seminar. The resulting

sense o social obligation created an implied pressure to sign up or the

advisors limited time only investment.

The bigger the decision, the more time and care it deserves. Ater all, the choices you

make today can have consequences or years to come. Ethical advisors know thisso

they give clients plenty o space or making smart choices, urging action only when

chronic indecision has hurt the clients interests in the past.

Unethical advisors see things dierently. They might push a deal to meet sales quotas

or earn bonuses. For them, the ast decision trumps the right decision.

dont let YouRselF be pRessuRed


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I can replace that

with something

better.

did You KnoW?

Churning reers to the excessive

buying and selling o securities in your

account by your broker, or the purpose

o generating commissions and without

regard to your investment objectives.

Churning can be a violation o SEC

Rules and other securities laws.

Source: SEC 2009, April 15, 2009


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Whenever you are presented with a proposed transaction, ask, What

does this cost me? In particular, ask about surrender charges, loads,

commissions, internal expenses, or other transaction charges. (The ex-

istence o charges isnt an abuse; not being told about them is.)

Always ask your advisor, What do you get rom this transaction?Third-party payment or commission isnt a red lag all by itsel. But i

the beneits or you arent enough to justiy that commission, look or

other investment options.

Consider whether the timing o proposed transactions is motivating

the recommendation. Too requently, new annuities are sold just as the

surrender charges on existing annuities have disappeared, or an advisor

suggests a replacement insurance policy or inancial product just as she

moves to a new irm.

spot the Red Flag

An advisor convinces a client to replace a variable annuity as soon

as its surrender charges have expired, telling the client that this is a

tax-ree transaction. The advisor makes $80,000 in undisclosed com-

missions on the replacement annuity. The client now aces a renewed

period o surrender charges.

At the suggestion o his advisor, a client buys an insurance policy with

an extravagant premiumnearly hal the clients annual income! The

client has no beneiciaries and doesnt need the insurance or estate

planning. What triggered the decision to buy? The advisor recommends

the policy as a tax-ree investment likely to perorm better than other

investment options.

Better or whom? Ethical inancial advisors are always on the lookout or ideas and

investments that make their clients lives better. In contrast, unscrupulous advisors typi-

cally base their buy/sell decisions on the size o their commission or ee. Because selling

sometimes eels like admitting a mistake, a suggestion to sell or something better

can be a powerul motivator or investorsand a recipe or trouble in the hands o a

scam artist.

FolloW the moneY


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Its verycomplicated.

No need to

bother you with

all the details

did You KnoW?

Financial abuse costs elders more than

$2.6 billion annually, though our in ive

cases are not reported.

Source: MetLife Mature Market Institute Study,

March 2009


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asK, asK and asK again

Financial matters are complicated. Thats why we rely on advisors in the irst place. Un-

ortunately, lack o inancial expertiseor other issues, such as dementiacan make

clients vulnerable to raud.

spot the Red Flag

An elderly client asked her bank or a better rate on her CD. She walkedout with an annuity that could not be surrendered or more than 10

years without a steep sales charge. The client had no idea that her new

investment worked very dierently rom her old one.

A client had never heard o the companies he held as individual stocks

in his advisor-managed portolio. He discovered this only ater incurring

substantial losses.

A client was unaware that his brokerage company had been named

as the trustee in his estate planning documentsand that the named

trustee could not be replaced.


Tell your advisor when you dont understand something. Ethical advi-

sors will be happy to explain: they know that the best clients are well-

inormed clients. I you dont understand the explanation, ask again.

Forget about handing over your inancial decisions to a proessional

because you dont want to be bothered. At a minimum, you must be

able to assess whether your advisor is helping you.

I necessary, get a second opinion on your advisors recommendations

or approach. The cost o another set o eyes is trivial compared with the

potential cost o raud or abuse.

Plan or the possibility that you may not be able to handle your own

aairs. Give power o attorney to a trusted riend, relative, or proes-

sional to make inancial decisions in the event that you cannot act on

your own behal.


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RemembeR


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to pRevent Financial abuse:

Trust, but always veriy. Ask your advisor to provide services with the duty

o care o a iduciary. Identiy the organizations that license or supervise him

(see the reerence list on the next page), then check their Web sites or his

background and disciplinary history, i any.

Never leave blanks on paperwork, and always ask or inal or submitted cop-ies (with the word inal or submitted stamped right on them).

Ask whether your investments are regulated or supervised by third parties.

Make sure you receive regular statements rom independent third-party

sourcesnot just rom your advisor.

I you invest in limited partnerships, real estate, or non-traded securities,

veriy that the investment manager is audited annually by a reputable inde-

pendent accounting irm.

Always make your checks payable to the advisors business or custodiannot

the advisor hersel. Question any situation that gives your advisor unlimited

access to your money.

Take your time beore any decisionand dont make major decisions just

ater a lie change, like a divorce or the death o a loved one. Find a trusted

amily member or riend to help in reviewing or making the decision.

Ask your advisor to list the pros and cons o each investment idea. I you hear

only the pros, youre not getting the ull story.

Understand how your advisor earns her pay. She should disclose any

conlicts o interestactual, potential, or perceivedthat might aect

her recommendations.

Beore agreeing to any transaction, careully consider the charges youll incur

and the timing involved.

Understand your investments. Ask i you dont understand, and get a second

opinion i necessary.

Designate a trusted riend or relative to handle your investments in case

something happens to you.

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ResouRces and useFul linKs

to Find a Financial planneR oR advisoR in YouR aReawww.CFP.net/search

www.panet.org/PlannerSearch/PlannerSearch

www.napa.org (click Find An Advisor on the let navigation panel)

to checK the bacKgRound oF a Financial planneRoR advisoR

Some o these resources may also tell you about your advisors employment history, disci-

plinary record, and registrations.

www.CFP.net/search

www.fnra.org/brokercheck

www.adviserino.sec.gov

to File a complaintStart by taking your complaint directly to the advisor and the management o your advisors

broker-dealer or investment advisor. I you ail to get a satisactory response, then contact

the agencies below.

I the complaint is about:

a broker or securities product (such as stocks or mutual unds), contact:

The Financial Industry Regulatory Authority (FINRA):

www.fnra.org/Investors/ProtectYoursel/p118628

Your state securities regulator:

www.nasaa.org/QuickLinks/ContactYourRegulator.cm

an insurance salesperson or product (such as insurance policies or annuities), contact:

Your state insurance commissioner:

https://eapps.naic.org/cis/fleComplaintMap.do

an investment adviser or investment advice, contact:

The U.S. Securities and Exchange Commission (SEC):

www.sec.gov/complaint.shtml

Your state securities regulator:

www.nasaa.org/QuickLinks/ContactYourRegulator.cm.

a CFP certifcant, contact:

CFP Board: www.CFP.net/learn/complaint.asp

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1425 K Street, NW, Suite 500, Washington, DC 20005

P: 800 -487-1497 F: 202-379-2299

[email protected] www.CFP.net

Certiied Financial Planner Board o Standards, Inc. (CFP Board) is a nonproit certiication and

standards-setting organization whose mission is to beneit the public by granting the CFP

certiication and upholding it as the recognized standard o excellence or competent and ethical

personal inancial planning. CFP Board owns the certiication marks CFP, CERTIFIED FINANCIAL

PLANNER, and in the U.S., which it awards to individuals who successully complete CFPBoards initial and ongoing certiication requirements. CFP Board currently authorizes 62,000

individuals to use these marks in the U.S. Learn more about CFP Board, CFP certiication and

cfpboard financial self-defense guide

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