Steering Clear of Mayhem
October 3, 2019
For most people, making decisions about their financial future is a scary thing. In my 40+ years working in the field of finance I have seen too many people fall into financial ruin. As much as I wish it weren’t true, but just one poor judgement error in the world of finance can tear through your life, and your hard-earned money, like a tornado through a trailer park.
When it comes to your money, there is no shortage of con artists working tirelessly to steal it right out of your pocket and into theirs. Yes, the “something for nothing club” remains alive and well. Fortunately, I have a few cardinal rules that can help you identify and avoid these thieves long before they’ll ever get close to confiscating your wealth!
Cardinal Rule #1: Make sure your Investment Adviser is NOT the custodian of your money.
The custodian is the firm that has control of your money. This means that whoever they are, they have direct access to your capital. It is easy to mistakenly believe that making your Investment Adviser, your custodian is a good idea. It is NOT! In practice this puts you in an extremely vulnerable position. Just think for a moment about Bernard Madoff who perpetrated one of the biggest Ponzi schemes of all time. I believe using a well-established, nationally recognized custodian is key. Think T.D. Ameritrade, Schwab or Fidelity etc. These custodians have a huge clientele, which means they risk substantial losses from hefty lawsuits in the event of impropriety.
Cardinal Rule #2: If it sounds too good to be true, it probably is.
This one seems like common sense, but when someone comes knocking at your door with the promise of huge financial gains greed can kick in. These schemes aren’t just limited to the financial industry either. They span almost every type of product or service imaginable. One great defense against scams is to ask the right questions. Ask for official documents that can verify their claims, corporate filings, corporate tax returns, or registration documents etc. By simply asking for things that any legitimate business would have, you can weed out the frauds. So be diligent and do your homework.
Cardinal Rule #3: Never entrust your money to any person or entity without ensuring proper safeguards and regulations are in place.
In essence, the Latin phrase caveat emptor comes into play. It simply means that the buyer alone is responsible for checking the quality and suitability of goods before a purchase is made. Prudent practice requires that you perform due diligence whenever you make significant purchases or investments. As daunting as reading stacks of paperwork may be, it is imperative that safeguards are in place. For example, if you are making an offer on a home you probably will have to deal with a closing company that holds your deposits in escrow. During this transaction, there is no shortage of paperwork to read and sign that many people will simply scan. By signing without ensuring that your money is protected against possible loses you are putting your money at risk. Always find out what insurance is in place to protect your money, and request specifics regarding these policies. In the example mentioned above some good questions to ask are “What is the amount of the bond?” When will it expire, and renew?” By asking these questions you are arming yourself with the knowledge necessary to stay on top of your situation which is crucial when it comes to protecting yourself. Remember “caveat emptor!”
In life, the 80/20 rule applies. About 80% of people are honorable and trustworthy. Not so much the other 20%. By following the rules I have outlined you have a good start at steering clear of mayhem. Make smart choices about your wealth and please don’t be afraid to ask questions.