Don’t let oth­ers pick your fi­nan­cial ad­viser.

Houston Chronicle - - EXTRA - Liz We­ston is a colum­nist at NerdWal­let, a cer­ti­fied fi­nan­cial plan­ner and au­thor of “Your Credit Score.” lwe­[email protected]­let.com twit­ter.com/lizwe­ston.

Gaylen Rust must have seemed trust­wor­thy to the peo­ple who gave him money.

Rust was a long­time busi­ness­man in Lay­ton, Utah, where he ran a coin shop started by his fa­ther in 1966. Rust also founded a char­ity called Legacy Mu­sic Al­liance that funded arts pro­grams in schools. An ad­mir­ing 2013 pro­file in the Salt Lake Tri­bune called Rust “the state’s big­gest pro­po­nent of arts ed­u­ca­tion.”

Fed­eral and state reg­u­la­tors, how­ever, say Rust was run­ning a Ponzi scheme. Civil law­suits filed late last year by the Se­cu­ri­ties and Ex­change Com­mis­sion , the Com­mod­ity Fu­tures Trad­ing Com­mis­sion and the Utah Di­vi­sion of Se­cu­ri­ties say Rust, his wife and one of his five chil­dren per­suaded hun­dreds of friends, cus­tomers and busi­ness as­so­ciates across the coun­try to in­vest more than $200 mil­lion in a bo­gus sil­ver trad­ing pool.

When scam artists tar­get groups of peo­ple who know each other or have some­thing else in com­mon, such as reli­gion, it’s known as “affin­ity fraud.” And it’s one big rea­son you shouldn’t rely solely on rec­om­men­da­tions from friends and fam­ily when choos­ing a fi­nan­cial ad­viser.

“If any­thing, word-of-mouth rec­om­men­da­tions are even more im­por­tant to the con artists than to the le­git­i­mate ad­viser,” said Bar­bara Roper, di­rec­tor of in­vestor pro­tec­tion for the Con­sumer Fed­er­a­tion of Amer­ica. “Where else are they go­ing to find their vic­tims?”

Ask­ing friends and fam­ily for re­fer­rals isn’t a bad way to be­gin your search for an ad­viser, Roper says. Just don’t as­sume your loved ones have done their due dili­gence.

The peo­ple who in­vested with Rust ig­nored sev­eral big red flags. Ac­cord­ing to the ac­tions filed:

• He wasn’t reg­is­tered in the se­cu­ri­ties in­dus­try.

• He claimed con­sis­tently high re­turns, say­ing he av­er­aged 20 per­cent to 25 per­cent an­nu­ally and never less than 12 per­cent.

• He didn’t use a third party, such as a bro­ker­age firm, to is­sue ac­count state­ments and in­stead pro­vided in­vestors with spread­sheets show­ing pur­ported trans­ac­tions.

Prom­ises of high re­turns with lit­tle or no risk are a clas­sic sign of fraud, as are state­ments gen­er­ated with­out su­per­vi­sion by a third party, Roper says.

Ad­vis­ers who aren’t ac­tual scam artists might still have check­ered his­to­ries. One re­search team found that one out of ev­ery 14 ad­vis­ers reg­is­tered with Fi­nan­cial In­dus­try Reg­u­la­tory Author­ity, a pri­vate sel­f­reg­u­la­tory or­ga­ni­za­tion, had records of se­ri­ous mis­con­duct such as fraud, forgery or unau­tho­rized trad­ing. Thirty per­cent of that group had mul­ti­ple of­fenses, said Mark Egan, a pro­fes­sor at Har­vard Busi­ness School and a co-au­thor of the study.

“Ad­vis­ers who have en­gaged in mis­con­duct in the past are five times as likely to en­gage in mis­con­duct again in the fu­ture,” Egan said.

Even ad­vis­ers who don’t run afoul of reg­u­la­tors can be bad news if they don’t put their clients first or are sim­ply in­com­pe­tent. To pro­tect your­self, Roper rec­om­mends the fol­low­ing steps to vet fi­nan­cial ad­vis­ers:

Make sure the ad­viser is prop­erly reg­is­tered. Fi­nan­cial ad­vis­ers should be reg­is­tered ei­ther as a bro­ker/dealer or as an in­vest­ment ad­viser, Roper says. You can start at Bro­kerCheck, FINRA’s free on­line tool. If the per­son you’re check­ing out is an in­vest­ment ad­viser rather than a bro­ker, the tool will send you to the In­vest­ment Ad­vi­sor Pub­lic Dis­clo­sure data­base. Ei­ther way, you should see their em­ploy­ment and dis­ci­plinary his­to­ries.

Take any dis­ci­plinary his­tory se­ri­ously. Some­times mi­nor com­plaints end up in the data­bases, but typ­i­cally the mis­con­duct re­ported is se­ri­ous, Egan says. At the very least, it’s worth talk­ing to the ad­viser about what you find if you’re a client. If you haven’t hired this per­son, keep look­ing, be­cause most ad­vis­ers never run afoul of reg­u­la­tors.

Look for, and ver­ify, the right cre­den­tials. Peo­ple of­fer­ing money ad­vice should have at least one cre­den­tial that sig­ni­fies a rig­or­ous fi­nan­cial ed­u­ca­tion and ad­her­ence to a code of ethics, such as cer­ti­fied fi­nan­cial plan­ner (CFP) or char­tered fi­nan­cial an­a­lyst (CFA), Roper says. CPAs who are per­sonal fi­nan­cial spe­cial­ists (PFS) meet re­quire­ments sim­i­lar to a CFP. You can ver­ify an ad­viser’s cre­den­tial at the sites of the or­ga­ni­za­tions that granted them — the CFP Board of Stan­dards, the CFA In­sti­tute and the Amer­i­can In­sti­tute of Cer­ti­fied Pub­lic Ac­coun­tants, re­spec­tively.

You can check out any un­fa­mil­iar cre­den­tials at FINRA’s site to see how much ef­fort and ed­u­ca­tion is re­quired to ob­tain them, Roper sug­gests.

“Just the fact that an in­di­vid­ual has a string of let­ters af­ter their name,” she says, “doesn’t mean they rep­re­sent any valid area of ex­per­tise.”

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