How to avoid investment fraud

The words “Dave Ramsey” usually invokes some pretty strong emotions when discussing financial principles. Let me say up front that I am a certified Dave Ramsey counselor, and I am debt free (except for our mortgage). We follow Dave’s Baby Steps and are very comfortable with what he teaches. Not every word is gospel, but for the most part his “grandma and God’s” common sense approach is dead on.

Why would I start out this post by affirming the Dave Ramsey way to personal finance? Because this post is base on a newsletter that I receive from him. In the latest “Investing Minute” newsletter, Dave lists 4 things you can do to avoid investment fraud.

1. Ask questions. An honest financial advisor with the heart of a teacher will be upfront with you. A scammer will dodge your questions or offer vague and unsatisfactory answers. It’s your money, so don’t be afraid to be inquisitive.
2. Stay involved. Keep an eye on your investments. Now, this doesn’t mean checking them every day. But open your mail and follow up with your investment professional. The more disengaged you are from your money, the more likely you are to fall victim to fraud.
3. Hire an advisor you can trust. You want an investment professional with the heart of a teacher. If he isn’t willing to answer your questions—or explain things in simple terms—then fire him and move on to someone else. It’s hard to trust someone who doesn’t have time for you.
4. Make sure the money you invest is paid to the mutual fund company, not your advisor. There is never a reason you should make a check payable to your advisor. Bernie Madoff wore both hats in his clients’ transactions, as advisor and owner of the mutual fund company. That is a big reason why he was able to get away with so much. You should be able to access your account and statements directly and not have to rely on your advisor to get them. Also, you should be able to withdraw any investment and receive it in a week’s time.

Remember this is your money. Quite possibly your retirement or money you are saving for your kids college. You can’t treat it like you do the daily newspaper. You need to make sure that the professional you choose to help you meet your goals, has your best interest at heart. If he/she doesn’t contact you at least every couple of months you need to find out why. Don’t be afraid to contact them and ask questions. In this relationship you are the boss. They are working for you and you need to be happy with the service. If not, like Dave says, fire them and move on.

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