From the standing desk of Jeremy Torgerson, nVest Advisors, LLC CEO:

In the more than a decade that I’ve been an investment and financial advisor, I’ve had the misfortune of seeing a lot of unethical and even illegal activity up-close. It grieves me that our industry seems to, like many others, attract people to it who come to do harm, let alone fail to act in a client’s best interests.

Industry papers and publications from the SEC and state regulators are always full of stories about investors swindled out of money not only by unscrupulous characters within our industry but also by outright imposters to the industry.

For example, here is the Texas State Securities Board 2018 Report on the disciplinary actions it engaged in last year. But Texas is not alone; every regulatory agency in the country has public records and lists of prosecuted illegal activity, disciplinary actions, and license information (or lack thereof) that you, as a consumer, need to know about.

At nVest Advisors, we have a policy of “aggressive honesty”. It doesn’t just mean being transparent in a regulatory sense, although that’s a significant part of it. Plus, as a legal fiduciary and fee-only firm, we are required to disclose abundant information to our clients about our firm, our practices, our fees, and any disciplinary, legal, civil, or financial issues.

But aggressive honesty means more than just complying with required disclosures. It’s about respecting our clients enough to always tell you what you need to hear, not just what you want to hear. It’s about using simple, plain-language descriptions in our interactions with you instead of filling the pages and our phone calls with industry and legal jargon. It’s about keeping your planning and investing simple, straight-forward, and conflict-free. And it’s about doing only what’s right, even if the right thing is to not bring you on as a client.

(This isn’t always the case, even in generally reputable firms – I was personally coached early in my career that you sometimes have to sell a client what they want before you can sell them what they need. In that environment, the sale was king and getting the account was all that mattered. Doing the right thing was not so admired if it interfered with production quotas. But I digress.)

We’ve written about sketchy sales practices before, and warned you about the dangers of going blindly into an investment or financial situation without due diligence and a healthy bit of skepticism. But because these kinds of things keep coming up, let me go over a short list of things to be watchful for, things that should make you run away, and things that just can’t be true.

The “Life-Insurance-Is-My-Bank” / “All-Up, No-Down” Fixed Annuity Salespitch

One that always sticks in my craw, and I see it all the time, is an insurance salesperson claiming to have a product that allows you to “bank on yourself”, or who claims to have a product that gives you “market returns with no risk”.

What they’re peddling is either an expensive life insurance policy with a cash value component (and lots and lots of built-in fees and commissions), or an insurance product called an Equity Indexed Annuity.

I could go into great detail about how much nonsense insurance agents are allowed to get away with. So much of it is the sales training and lack of real regulatory oversight the industry enjoys. Insurance agents are trained to portray their company’s product line as a fit for every conceivable financial woe – the “pill for all ills”. Yet I’ve also never seen any single financial product more prone to misrepresentation, sales fraud, outright lies, and lies of omission than insurance products. Bar none, insurance agents are #1 on my industry-peer sh*t list.

Although there are of course perfectly valid reasons to include these kinds of products in some client portfolios, they are so egregiously misrepresented by the salesperson, so often, you should run away from anyone selling one – especially if they have a creative reason to buy it that is totally unrelated to the real nature of the product. Life insurance should be bought to protect the income of the person who is insured. Annuities are bought to exchange (for a hefty fee) the risk of running out of money at a later date for a guaranteed amount of money from the insurance company. Neither product is a replacement for banks, investments, a financial plan, or retirement savings.

Anything, and I mean ANYTHING, “Crypto”

I’ll probably make a lot of younger investors scoff with this, but the last thing you should ever invest in is something you or your advisor do not fully understand. I’ve been in the business for more than a decade, and this is my day job, and I cannot still grasp all the nuances of what makes a cryptocurrency tick. You hear a lot of buzzwords about blockchains and coins and mining, but it’s all nebulous and “dark web”, and altogether a horrible, horrible idea for money you can’t afford to lose.

One of the problems we have in this virtual world is that “building a personal brand” has become a full-time vocation for people. Many companies exist for no other reason than to show the world that they exist. Anyone with a computer can have a beautiful, professional website online within an hour. Cropped and filtered photos litter our Facebook and Instagram feeds, and people brag about those fleeting “greatest hits” moments in their lives, often hiding real problems underneath the facade.  And everyone on the planet is in the game of being a “coach” showing you their amazing system that will solve whatever problems we think we have.

The same is true of many investment opportunities. Sometimes a great looking company is just a couple of guys with a website, working from a Starbucks. One recent example of a company run completely wrong happened just this week when a Canadian crypto-currency “bank” declared bankruptcy because their CEO died unexpectedly and no one knows the password to his personal laptop, where the “bank” was actually run from. Investors are out $190 MILLION because the dude didn’t leave his password anywhere.

(There’s even suspicion that this guy faked his death and took off with the money.)

Cryptocurrencies are, in this firm’s official opinion, a fad at best and a scam at worst. None of our clients are invested in any cryptocurrency as part of an account we manage, and we don’t see that changing any time soon. If we cannot understand every little detail of the investment, then there is simply no way for you as a consumer to do so.

The bottom line is: if you don’t completely understand an investment, including its risks, possible returns, liquidity, and who regulates it (and who is watching the watchers), do not, under any circumstances, invest in it.

The “I can always beat the market” braggart

There have been so many studies done on this, I won’t belabor this point too much, but suffice it to say, not a single investment manager has ever outperformed the broad market over an extended period of time. They may get lucky for a few months or years at a time, and then often use that in advertisements (which will usually run afoul of SEC and FINRA rules), but none of them have ever been able to beat the market for the length of time most people invest. And when you add in high management and marketing fees of most mutual funds, there is no way to beat an index fund long-term.  Read here why we don’t advertise investment returns.

If you’ve got a salesperson touting some kind of inside market knowledge, a secret trading formula, a preposterously amazing track record of stock-picking, or other such nonsense, be extremely cautious. You’ve either got a runaway ego cherry-picking a few successes out of a huge pile of losses, or a con artist. It’s as simple as that.

Unlisted, non-traded, or other un-watchable investment “opportunities”

If you read the Texas report linked to above, most of the 2018 enforcement actions involved people pitching sketchy, unverifiable, “ground floor” types of investments. I personally knew an advisor in Colorado who, years after we lost contact, got caught offering bonds in his own investment firm promising 24% return, and ended up going to prison for running a Ponzi scheme and wire fraud (and this was after serious regulatory discipline a few years before). Had investors taken the time to look up his background, they wouldn’t have fallen prey.

Even if an investment like this isn’t a scam, and most aren’t, there is an inherent danger in investing in products that require you to lose control of your money for any length of time, or in investments that aren’t tracked by outside analysts or traded on public exchanges.

We’d never use anything like that for a client portfolio under our care. Don’t let another advisor do that to you, either.

Anyone who asks you to write the check to them

There ARE firms who legitimately and completely legally take what is called “custody” of client money, but those firms have very strict regulations for accountability and transparency that have to be followed. Honestly, though, very few investors need a firm or advisor who takes custody. Even legitimate ones can get into trouble, but nearly every Ponzi scheme I’ve ever studied involved the client personally signing over money to the con artist (Bernie Madoff comes immediately to mind).

A best practice would be to never do business with anyone who ever asks you to put your money in their name. At nVest Advisors, all of our client money is held outside our firm with third-party custodians such as TD Ameritrade. Your account statements will come from them, not from us, so you have the assurance of the third-party of what your account value is and what actually is going on while the money is there.

Other warning signs

Even when an advisor or sales rep doesn’t cross the line overtly into unethical or illegal behavior, there are a lot of warning signs of possible future problems, and even those can usually be spotted before you sign on as a client:

  • An advisor with a personal history of financial problems, for instance, is an advisor who generally isn’t practicing what they preach. Or worse, they are advisors who, while generally ethical, can have lapses if their own personal financial situation gets too dire.  (Besides, why would you entrust your money with someone who obviously can’t manage their own?)
  • Reps with previously dissatisfied customers or disciplinary action by their employers are also big, waving red flags. Yes, sometimes bad things happen to good people, and sometimes that customer complaint was frivolous or vindictive, but advisors with complaints or discipline on their record, especially repeat offenders, are serious question marks.
  • Advisors who do lots of job-hopping. Working in the industry for 20 years might sound impressive, but having 15-20 different jobs at different companies is a definite problem. There is definitely a way of having a career that is 20 years long but only “an inch deep”. The financial services industry loves and caters to the employees who produce and have not caused HR problems. They also generally make it very difficult for an advisor who is producing to leave, even if the advisor wants to. When you see an advisor jumping from job to job, company to company, there’s almost always something wrong: either they are failing to meet production quotas, or have been in trouble in ways that don’t legally rise to the level that the employer has to disclose publicly.
  • Advisors who want to play with your money instead of creating a sound, reason-driven portfolio strategy. There shouldn’t be “dabbling” with money you can’t afford to lose. If you have an advisor who is always eager to delve into IPOs or is always talking about the next “hot stock”, please be really, really careful. I’ve seen many more advisors who talk a great game, than those who actually deliver on it.
  • Any advisor who cannot explain their strategy or investment recommendations simply and easily. This means they either don’t understand the product or fund well themselves or else they really don’t want to give you the details.
  • An advisor who later becomes really hard to get in contact with. Especially if they earn commission, many times you’ll see the advisor a lot as you first become a client, and then almost never afterward. Except, of course, when they call and want you to buy something different a year or two later. If you notice, especially in tough markets like the past six months, that your advisor is not actively reaching out to calm your concerns, or worse, is actually no returning your calls, it’s time to find someone new.

The good news is, you can (and should) check for problems before you invest.

An advisor’s or agent’s professional history and that of their firm are always available online.

If the advisor is able to work with actual investments, they will be securities licensed and will have a public record, complete with 10 years of prior employment history, financial and disciplinary warnings, and more, on two different websites.

  • If they work in any capacity on commission, they will be found at the FINRA Broker Check website.
  • If they work in any capacity as a fee-only advisor, they will be found at the SEC’s IARD Lookup site.
  • If they claim to be an advisor but they can’t be found in either database, then they are either only an insurance agent or are scamming you. 

For full disclosure and to give you an example, here’s my own file at FINRA (I had both commission and fee capability until I gave up the commission license in 2015, which is why it says “Previously Registered Broker” and current Investment Advisor), and my SEC IARD file (where the most current info is).

For registered investment advisor firms, you also always have the right to read our disclosure brochures, which our clients get at least once per year. Here’s our Firm Brochure, my personal Brochure, and our Wrap Fee Brochure for certain investment account management options.

I’m also insurance licensed in Texas and Colorado, but you can only see that info by going to each state’s Department or Division of Insurance and finding the Agent Lookup in each state. Also, insurance agent disciplinary actions are seldom linked to their profile page – you may have to search a separate database for “Disciplinary Actions” on the state websites.

In Summary

This post may come across as either cynical or a slap at other advisors, and that’s definitely not my intention. The vast majority of us in this industry are honest and most genuinely want to do right by their clients. While I’d argue that wanting to do right and voluntarily requiring yourself to do right by becoming a legal fiduciary are two completely different levels of commitment, I’ll grant that most advisors are not wanting to con you or rip you off.

But I’d also say that you should never blindly trust any of us. Even generally ethical advisors are human beings, and can mess up.

The best thing you can do is spend the time to understand your investing needs, work with an advisor to create your plan, and stay an active and alert (and slightly skeptical) participant in your own financial affairs. I wrote a blog post a year or so ago on the 9 ways you can be a great client – that really goes a long way to not only keeping alert about your advisor and your investments, but makes you a great partner for any advisor to work with.

All my best!