Is your financial adviser a fraud?

How to spot a financial faker — and protect yourself from being scammed

Published: June 22, 2015 06:00 AM

Investors, beware: Your financial adviser may be faking his or her credentials. A recent Investor Alert from the U.S. Securities and Exchange Commission (SEC) warns investors that fraudulent advisers may misrepresent their backgrounds and experience to lure unsuspecting clients into buying questionable products and services.

“In order to attract unsuspecting investors and gain their trust, fraudsters may boast about credentials they do not have,” the SEC warns. “They may fabricate, exaggerate, or hide facts about their backgrounds to portray themselves as successful professionals and to make you believe that the investments they offer are legitimate. Others may repeat these misrepresentations and contribute—perhaps unintentionally—to a fraudster’s false reputation of success and professional accomplishment.”

For more information on choosing a financial adviser, read "7 Questions You Need to Ask Your Financial Adviser."

Here are four ways in which fraudulent advisers bamboozle you and how you can protect yourself:

Confusing credentials

Certified financial planner, certified senior adviser, certified senior consultant, certified specialist in retirement planning, certified retirement services professional—who can make sense of this alphabet soup? But while some of these titles confirm actual expertise, many others are misleading and some are little more than marketing ploys to lure credulous clients into buying dubious financial products.

Our advice: Check out titles and certifications. Go to Paladin Registry, click on “Investor Tools” and scroll to “Check a Credential.” Or use the Financial Industry Regulatory Authority’s (FINRA) Professional Designations guide. Make sure the credential is from an accredited organization, that the training and educational requirements are stringent, and that there’s an easy way to file a complaint, if necessary.

Misrepresent awards or honors 

The SEC is pursuing a case in which the respondent allegedly solicited investors for a private fund by claiming he was named a “Top 25 Rising Business Star” by Fortune Magazine. In fact, no such distinction exists. Similarly, questionable financial advisers may tout a “Five Star” award from Five Star Professional. It sounds good but candidates are nominated by peers and firms, not their clients.

Our advice: Verify all awards and honors. Use more objective criteria when choosing an adviser.

Inflate their educational background or professional experience

The SEC Alert cites a defendant whose prospectus for a fictitious hedge fund stated he had earned undergraduate and graduate degrees from Harvard University, when he had only enrolled there for a few semesters. In another example, the defendant misled investors about his trading track record as a private fund manager and lost almost all of investors’ money.

Our advice: Do a basic background check. Make sure the adviser is registered with your state’s securities regulator (contact the North American Securities Administrators Association) or insurance commission (contact the National Association of Insurance Commissioners). 

Hide previous problems

An adviser could have the right credentials but still be a crook.

Our advice: Consult FINRA’s BrokerCheck for any disciplinary actions against investment adviser firms and individual representatives.

Don’t trust someone just because he or she claims to have impressive credentials, stellar experience, or manages to have created a successful reputation. Always ask for details and be particularly skeptical if you do not receive direct and specific answers to your questions, encounter discrepancies, or unearth conflicting information. 

Catherine Fredman

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