Many people following the Bernie Madoff saga and other Ponzi schemes wonder how highly intelligent and even sophisticated investors found themselves caught in his net. The Financial Industry Regulatory Authority (FINRA), the regulator of securities firms doing business in the U.S., has been searching for answers. It’s especially important now, because fraud will be on the rise as scam artists look for any hook that they can find to exploit investors, who may be especially vulnerable as they look for ways to recover from their recent losses.

The psychology behind the pitch
The old saying goes: “If it sounds too good to be true, it probably is.” Solid advice, but probably too simplistic today, FINRA suggests. The problem is deciding when “good” becomes “too good.” There’s no bright line. Investment scammers make their living by making sure that the deals they tout appear both to be good and true.
FINRA’s Consumer Fraud Research Group has examined hundreds of undercover audio tapes of those they call the “masters of persuasion” at work. The tapes reveal that pitches are tailored to match the psychological profiles of their targets. Groping for an Achilles heel, they ask seemingly benign questions—about health, family, political views, hobbies or prior employers. “Once they know which buttons to push, they’ll bombard you with a flurry of influence tactics, which can leave even the savviest person in a haze,” warns FINRA.

The five tactics that ensnare investors
The tactics that scam artists use may seem familiar to their targets because legitimate marketers use them, too. That familiarity may lend credibility to the pitch and throw an investor off guard. An important part of resisting persuasion tactics, FINRA suggests, is to know them before encountering them.

• The phantom riches tactic dangles the prospect of wealth, luring an investor with something similar to Madoff’s double-digit returns or R. Allen Stanford’s high-interest rate CDs.
• The source credibility tactic cloaks the scam artist in legitimacy with claims that he or she is with a reputable firm or has special credentials or experience. “Believe me, as a senior vice president of XYZ Firm, I would never sell an investment that doesn’t produce.”
• The social consensus tactic leads investors to believe that other savvy investors are already on board. It often goes something like this: “This is how Jones got his start. I know it’s a lot of money, but I’m in—and so is my mom and half her church—and it’s worth every dime.”
• The reciprocity tactic works by having the scam artist offer to do a small favor for an investor in exchange for a big favor. One common example is a promise to give the investor a reduction in a commission that would be charged.
• The scarcity tactic traps an investor by creating a false sense of urgency, encouraging the investor to act immediately. Often, there’s a claim of limited supply, such as: “There are only two units left, so I’d sign today if I were you.”

High on the list of targets
By comparing victims of fraud against nonvictims, FINRA research has identified several factors that make it more likely that an investor will succumb to the attentions of a scam artist.
Key among them is reliance on friends, family and coworkers for advice. For example, in a study of groups of investors, 70% of victims of fraud chose investments based primarily on advice from a relative or friend. Yet the percentage was only one-third for the national sample of investors examined. Others factors included: owning high-risk investments; being open to new investment information; and failing to check the background of the individual making the investment offer.

The seven red flags of fraud
FINRA offers the following warning signs that should put anyone on notice that an investment offer may not be what it seems.
1. Guarantees: An investor should suspect anyone who guarantees that an investment will perform in a certain way. Nothing is absolute in the world of investing.
2. Unregistered products and unlicensed “professionals”: Many investment scams involve unlicensed individuals selling unregistered securities. Madoff wasn’t even a registered investment adviser until 2006. His SEC filings show some technical violations, which might have been enough to scare away some investors, if they had done their research.
3. Overly consistent returns: Any investment touted as consistently going up month after month—or that provides remarkably steady returns regardless of market conditions—should be regarded with suspicion.
4. Complex strategies: Anyone who credits a highly complex investing technique for unusual success probably should be avoided. Legitimate professionals should be able to explain clearly what they are doing.
5. Missing documentation: If someone tries to sell a security without all the paperwork (a prospectus for a stock or mutual fund; an offering circular in the case of a bond), he or she may be selling unregistered securities.
6. Account discrepancies: Unauthorized trades, missing funds or other problems with account statements could be the result of a genuine error, or might indicate churning or fraud.
7. An overeager salesperson: No reputable investment professional should push anyone to make an immediate decision about an investment, or tell the person that he or she has to “act now.”

The best protection
Finally, the chance of being a victim of a Madoff or Stanford type of scheme may rest on the questions that an investor asks and the answers that he or she receives. Is the individual licensed to sell the investment? Which regulator issued the license? Has that license ever been revoked or suspended? Is the investment registered? If so, with which regulator? Find out about support organizations, too. According to some reports, Madoff, who was managing billions of dollars, used a three-person accounting firm, one of whom was a secretary and another a retired partner. This should have raised some eyebrows.
Persistence is the hallmark of a successful schemer. Investors who are persistent themselves—doing the necessary research and insisting upon all the answers to their questions—should be successful, too, outwitting any schemer’s plans to part them from their money.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Has recent market volatility got you worried about your current investment strategies? Before changing directions on your own, it’s a good time to look at getting professional assistance with your investments. Professionals are experienced in analyzing the significance of economic and market events and their portfolio management implications.

But whom can you trust?
Trust is an intangible quantity in a relationship. It’s not something that you can measure or quantify scientifically. But when it comes to choosing someone to serve as an investment advisor, if you cannot be 100% certain at the outset that the person whom you choose deserves your trust, certainly you want to do all that you can to stack the odds in your favor.
Just as with choosing a doctor, lawyer or other professional, finding the right advisor is a matter of due diligence— conducting a detailed analysis and appraisal of the candidates that you are considering to entrust with your assets.
Here are some suggestions that may help you along as you do your research:

• Take advantage of the experience of others. Ask your family, close friends and other advisors (your attorney or accountant, for example) for a referral to someone with whom they have established a successful relationship.

• Use a screening process. Contact several candidates, visit their Web sites and contact them to obtain written information about themselves and the organization with whom they are affiliated.

• Make introductory appointments. Face-to-face meetings with each advisor can tell you a great deal, but first verify that you will not be charged for the visit. The meeting is likely to give you an idea as to whether he or she is someone with whom you will be comfortable.

• Find out about the advisor’s knowledge, experience and specialties. For instance, if you have a significant amount to invest, be certain that the advisor has an extensive background in wealth management for affluent investors.

• Make sure that the advisor has comprehensive resources. He or she should have a wide array of investments choices available; access to research, up-to-date analytic tools and relationships with other professionals when you have need of guidance outside of the expertise of the advisor.

• Determine what additional financial services the advisor offers. Look for an advisor who can help you integrate your investment strategy with your retirement and estate planning goals or has someone on staff who can.

• Understand how the advisor is compensated. Your advisor may be compensated in several ways: He or she may charge a flat fee, charge a percentage fee based upon the assets that he or she is managing, or receive commissions.

• Check references. If you don’t know anyone who has used the services of the advisor that you are considering, ask for the names of some of the advisor’s clients who would be willing to talk to you about their experiences with the advisor.

Interview us
We would be pleased to be on the list of candidates that you are considering as your investment advisor. You’ll find that a meeting with us (without cost or obligation, of course), will reveal that we can provide you with reliable, trustworthy advice about your investments.
What’s more, we can tailor our services to what you are looking for. For instance, you may choose to have us provide the guidance, but leave you to make the ultimate decision making. Or, if you are someone who expects that an investment manager should be making the important decisions, you may leave them to us.
We are ready to answer your questions. Contact us now to set up an appointment at your earliest convenience.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

In a relationship, generally, one of the partners handles most of the financial planning and money issues. But what happens when the spouse who actively managed the couple’s assets and financial future is no longer the decision maker? The less experienced spouse has to step up to the plate, usually with little or no warning. Because this transfer of responsibility is often occasioned by death, disability or divorce, it can be an emotionally challenging time. Yet critical decisions concerning investments, insurance, financial and estate planning need to be made to avoid or minimize financial hardships later.
Here are some guidelines to help a novice get up to speed. Putting your financial life in order is essentially a five-step process:

• Determining your financial and estate planning objectives;
• Evaluating the continued viability of any plans in place;
• Understanding the options available to achieve your goals;
• Formulating a plan to achieve your goals; and
• Implementing the plan.

What do you have?
Begin by making an asset and plan inventory, securing existing papers that provide the information that you will need. These documents fall into two groups:

1. Financial documents—including tax returns, bank and brokerage statements, credit card records, mortgages, insurance, retirement and other employee benefits, and similar statements that have information on your assets and liabilities.

2. Legal documents such as your will, durable power of attorney, health care proxy and any trust agreements that name you as a beneficiary or trustee.

It is important to remember that both types of document may embody your estate and financial plans. For example, beneficiaries can be named in trust agreements and your will. But they also can be named in beneficiary designation forms on file with your employer (for retirement plans and other benefits), as well as banks, brokers and insurance agents. These designations are as binding as your will.
Once you have sifted through these materials, you will know the nature and extent of your assets, and how these assets will pass at your death.

Making adjustments
The next steps involve deciding whether the plan in place still makes sense and, if not, implementing needed changes. Following are the types of issues that you should consider:

• Reevaluation of income needs and investment goals to ensure that your current portfolio meets the needs of your new circumstances. For example, if you were not the primary income producer, you may want to adjust your investments to generate more income. If joint retirement is no longer an issue, your investment mix may need rearranging.

• Review of beneficiary designations in wills, trusts, bank accounts, retirement accounts and insurance policies. These must be changed to provide a new beneficiary if a spouse were previously the sole beneficiary. The same applies to designations for executors, guardians and trustees. Health care proxies and durable powers of attorney also may have to be updated to empower trusted loved ones to make decisions when you cannot.

• Use of a living trust to afford you the comfort and security of having a professional trustee manage assets during your life and ensure that they are distributed pursuant to your wishes, without getting involved in the probate process.

Children and grandchildren as beneficiaries may become more important in your planning. Issues that arise here include whether:

• A program of lifetime gifts makes sense in order to reduce your death taxes and put money in their hands for education, home purchase, etc.

• A trust should be established to provide for special needs children or the education of minor children.

• It makes sense to name children as your IRA beneficiaries so as to extend the payout period over their life expectancies and protect against poor financial decisions.

Don’t go it alone
Once you have reviewed your current plans and documents in place, and considered the issues and options, you can make informed decisions about a new plan tailored for your circumstances.
Throughout this process it is important to obtain professional guidance as you chart your course. We can offer you guidance on a wide range of investment, retirement and estate planning needs. Together with us—and with the assistance of your attorney, accountant or other professionals with whom you work—you will be able to gain the necessary knowledge about financial matters to allow you to make the decisions that are important for your future—and the future of others in your care.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Mortgage fraud schemes have existed for years. But, as the FBI warns in its annual mortgage report issued earlier this year, a depressed housing market provides an ideal climate for mortgage fraud perpetrators to employ a variety of schemes to take advantage of the downward trend. As lending practices tighten in response to the subprime lending crisis, financial institutions are employing higher standards and fewer loans are being originated—forcing scammers to turn to alternative methods.

Moving on up
Identity theft is a key tool for use in mortgage fraud schemes. In the days of subprime mortgages, thieves could pose as people with modest incomes and obtain mortgages in their names with little documentation. Now the identities of individuals with good credit have more value. One of the newest strategies, says the FBI, involves fraudulent equity credit lines.
There are several reasons for the development. Home equity lines are reasonably easy to open once the thief has the proper financial information. The lines are often for significant sums. Even open lines of credit are vulnerable. Scammers are counting on the fact that the funds may not be accessed for an extended period of time, and that account balances on monthly statements may not be regularly verified.

How it works
Here’s a typical scenario, courtesy of the FBI:
Once a victim’s identification has been stolen, the perpetrator poses as a customer, using the Internet to apply for a line of credit. He or she manipulates the customer account verification processes, including rerouting telephone calls and forging signatures.
The perpetrator uses the account holder’s identification information to contact a financial institution and request an advance of funds on the line. Once the advance is granted, the perpetrator sends a fax to the financial institution requesting that the funds be wire-transferred to another account. On receipt of the request, the financial institution contacts the account holder using the telephone number on record to verify the transaction. However, the call actually is forwarded to the perpetrator who verifies the account holder’s information to complete the wire transfer.

A call for vigilance
The Identity Theft Assistance Center, a nonprofit coalition of financial services companies, has been especially active in trying to get the word out to homeowners about equity line scams.
Steve Bartlett, chief executive of the Financial Services Roundtable, a consortium of banking-related companies that offers financial support to the Center, recently was quoted in The New York Times as saying that victims of such schemes typically are reimbursed by the lender if a bank investigation confirms fraud. But lawyers who represent victims of identity theft say that such remedies often do not come quickly or easily.
What about “preventative medicine”? Here are three suggestions:
• Borrowers should review every regular statement as they do their banking and brokerage statements, even if there were no transactions in the period covered by the statement.
• Everyone should take advantage of the fact that each of the three nationwide consumer credit reporting companies (Equifax, Experian and TransUnion) are required to provide free annual credit reports. Watch out for offers for “free” reports that are tied to paying a monthly fee for additional services. The ways to get a no-strings attached report are available at www.annualcreditreport.com.
• Finally, people who are especially concerned about identity theft should consider subscribing to a service that will alert them regularly to credit inquiries and account changes.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.