More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The criminal world’s best and brightest minds have targeted the advisory business as worried investors in the current low interest rate climate fall prey to scams that promise high returns, Financial Serial Killers co-author Tom Ajamie said Thursday at the annual meeting of the Financial Planning Association’s New York chapter.
“These financial scams are a quick way to make a lot of money and more profitable than knocking over an old lady with a purse,” Ajamie warned several hundred FPA advisors in his keynote address. “You don’t have to get your hands dirty, and the criminal element attracted to these scams are very intelligent.”
Ajamie, managing partner of the Houston law firm Ajamie LLP, wrote his book, Financial Serial Killers: Inside the World of Wall Street Money Hustlers, Swindlers, and Con Men, after winning a $429 million arbitration award against a former PaineWebber broker in 2001. The Wall Street Journal cited it as the largest award ever handed down by a New York Stock Exchange arbitration panel.
Ponzi schemer Bernie Madoff, not surprisingly, came in for a drubbing from Ajamie. One of Ajamie’s clients was a victim who lost a $5 million investment to Madoff even though he never met the man and Madoff’s office was unresponsive after cashing the victim’s check.
“When I called Madoff’s office, they never took the calls,” Ajamie’s client told him.
“Well, how did they get their money?” Ajamie asked.
“I wrote out a check for $5 million and sent it to them,” the client answered.
In short, Ajamie framed the typical con as follows: The victim meets a guy who knows another guy on the board of a university or a religious institution, and the guy says he invests billionaires’ money, but he won’t name the billionaires for reasons of confidentiality.
“There was nothing extraordinary about how Bernie Madoff pulled it off,” Ajamie said. “He belonged to the right country clubs, and if you get the endorsement from that country club, and ‘Bill says it’s good,’ it flows from there. That’s how people find their advisors.”
Con artists have made it essential for legitimate advisors to have a candid conversation with their clients about any fears they may have, Ajamie said. “Your clients really do need your advice, so recognize the fear and confront it,” he said. “It’s actually an opportunity for your business.”
Here are Ajamie’s recommendations for what that talk between advisors and clients should cover:
“Guaranteed” high returns. Advisors are seeing more pressure from yield-hungry clients to invest their money in overly risky securities, Ajamie said. “Reaching for return is often an invitation to disaster,” he said, noting that advisors must judge investments in terms of suitability, age appropriateness and whether a client has sufficient intelligence to understand the product.
Questionable new products. The boom in new products has given the criminal element an opportunity to create phony products, many of which fall into less regulated asset classes such as private placements and real estate investment trusts.
Transparency. Remind your clients that they can check you out online with sites such as FINRA’s broker check and your ADV forms. Be sure they understand the importance of segregated accounts rather than pooled accounts, and encourage them to Google you because you have nothing to hide.
Susan Kimmel, a CPA and CFP from Ridgewood, N.J., who attended the FPA conference said Ajamie’s speech was timely because she is increasingly worried about her aging client base, who are more vulnerable to scams.
“As clients get older, fraud gets to be more of an issue. I like to get the adult children involved, and I’ve had some success with that,” Kimmel said. “There are plenty of wonderful advisors, but unfortunately there are a lot of financial frauds out there.”
Read Dementia and Due Diligence: Why Clients’ Cognitive Function Is Your Concern at AdvisorOne.
Read California Agent Arrested on Charges of Financial Elder Abuse at our sister site LifeHealthPro.