Can You Trust Your Financial Adviser?


Boy band architect Lou Pearlman is singing “Baby, Bye Bye Bye,” to his freedom. 

On March 4, the business brain behind the Backstreet Boys and ‘NSync pled guilty to federal charges that he bilked more than $300 million from investors and banks. (No wonder Justin Timberlake once told Rolling Stone: “I was...monetarily raped by a Svengali.”) Pearlman, who is in jail without bail, faces up to 25 years incarceration and a $1 million fine. Pearlman's schemes included selling bogus stocks and inviting people to pay into a made-up employee investment savings program that promised large returns. He's now promised to help prosecutors recover some of his ill-got gains. Good luck.

Stars rely on business advisers to handle their money, and as Timberlake will tell you, it is important to know you can trust them. How well do you know your financial adviser? Experts recommend that you consider potential financial advisers the way you would a potential employee, after all you are hiring them to take care of your money

Treat them like job applicants, create your own hiring committee, and check references, says Neil Elmouchi, president of San Ramon, California-based Summit Financial Consultants. Elmouchi suggests asking a few people you admire professionally to interview your potential financial adviser as well. “It’s just like interviewing at a corporation. You need extra interviewers who can be astute.”

An easy background check is to request an adviser's Form ADV, says Robert Wasilewski, of Baltimore-Washington Financial Advisors in Maryland. Advisers use the two part form to register with the SEC. Part 1, which can also be located online, summarizes an adviser's education and their last ten years of business and disciplinary history. Form 2, which is not online, includes fee and investment strategy information. “A financial adviser should provide you with an ADV form,” says Wasilewski. 

In addition to reviewing Form ADV, be on the look out for advisers who ask for loans, and those who ask for investment checks to be written to them personally. “You should always write the check to the investment or to the broker/dealer,” says Elmouchi. “Never write a check out to the adviser to have him forward the money on. That is a violation of SEC rules. It’s illegal.” Adviser loans, meanwhile, are just ill-advised. Even if you’ve know this adviser for years and they promise to pay you back with a huge interest. “Don’t do it," says Elmouchi. "You don’t want an adviser with money problems."

Nor do you want one who sounds like they perform money magic. “You aren’t going to suddenly make 40% in returns,” says Wasilewski. "They wouldn’t be coming looking for you as their client if this were true. They would be doing this with their own money and would keep it quiet." Instead, look for someone who puts you first, then the money. "We are talking about long term planning, not just getting the best return for one year," says Elmouchi.

Before you start your new business relationship, further protect yourself by pining down who keeps custody of the assets you are about to invest, says Wasilewski. “You want a third party keeping custody of the assets. When we invest the assets, they are kept in TD Ameritrade (AMTD) a well known discount broker,” he says. So, if your broker buys stocks or bonds for you, then the assets are held for you in some third party. This would unlike what happened with Pearlman's jilted investors, who learned too late, that their assets were being kept by a third party—Pearlman’s pocket.



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