Ask first before you invest.
That was the message from Arizona’s cop on the Main Street beat, the Arizona Corporation Commission’s Securities Division, to Village of Oak Creek residents at Big Park Regional Coordinating Council’s April meeting.
Terri Alexon is the agency’s investor education coordinator and spends much of her time traveling across Arizona speaking to communities about wise investing and fraud prevention. Her presentation resonated with the representatives of the Council’s two-dozen homeowner associations during our meeting.
Unlike the U.S. Securities & Exchange Commission, which focuses on fraudulent activity at the big Wall Street firms, Arizona and other state securities regulators make a special effort to protect mom-and-pop investors on Main Street (not to forget our Village residents on Jack’s Canyon and Verde Valley School Roads)! Mom and pops, as well as more sophisticated investors, can be harmed not only by scam artists, but also by what is called “affinity fraud” (think Bernie Madoff), where a financial advisor in the local community can take advantage of longtime friendships in perpetrating fraud.
As someone who has been involved in financial regulation for many years, I hear many of the same stories that Terri tells her audience. I’ve even heard state regulators prosecuting cases involving affinity fraud say that the victims often refuse to testify against their financial advisor. They are either too embarrassed or cannot believe their trusted advisor would take their money.
This is not to indict the vast majority of investment professionals who are honest and work hard to help their clients reach their financial goals. Just keep in mind that guaranteeing unusually high returns on your investment is a fraud under federal and state securities laws. And don’t forget the rule of thumb: the more you expect to make from an investment, the more risk you take on. Only bank deposits, CDs and Treasury bonds are guaranteed by the federal government.
Terri recommends going to the division’s website at http://www.azcc.gov/AZInvestor for information on license status and disciplinary history of anyone who is registered to provide investment advice. And if you can’t find the advisor’s name (or their firm’s name), ask why not.
For one thing, unlike the medical and legal professions, which essentially prohibit unlicensed persons from calling themselves medical doctors or lawyers, there are few restraints on sales professionals in the securities industry from using fiduciary-like titles (such as ‘advisor’,‘financial planner’ or ‘wealth manager’) that imply a trusted relationship like a doctor or attorney.
The challenge in finding a trusted advisor is that financial oversight by the government began in the 19th century and remains fragmented. Your financial advisor may work for a bank, credit union, brokerage or investment advisory firm, or an insurance company. Some financial advisors are salespeople while others are fiduciaries required to act in your best interest. Some are registered as both.
In addition, ask your financial advisor how they are paid. Of course it’s rude to ask how much someone makes in terms of salary, but it’s perfectly reasonable to ask if your advisor is paid by you, or in addition, financial incentives by companies that use them as distribution channels for their products. Keep in mind that bonuses for selling products, in addition to commissions, are perfectly legal. Ultimately it’s the responsibility of the investor to read the fine print and other disclosure documents provided by the advisor or their firm.
Financial regulators recently approved new ‘best interest’ regulations to enhance investor protections. Brokerage firms are now required to educate their sales force on how to manage conflicts and act in the best interest of their customers. Like fiduciaries. Currently it’s a work in progress.
That is why Terri’s message to the Big Park Council and Arizonans in general is important to your financial health. Ask first before investing.
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