Enron and Madoff and Ponzi! Oh My!: How to Background Check Your Financial Professional

My Early Retirement Journey - Background Check
So when I started My Early Retirement Journey, one of the first things I had to reconcile was the fear of letting my money go to a place I didn't understand. Every few years, we hear the stories of Bernie Madoff, or the next Bernie Madoff, or the Enrons or even watch CNBC. CNBC has an entire 13-season-and-counting run of American Greed which chronicles stories of greedy doctors, businesses, and financial advisers and firms. One must wonder, who is going to be next? When will the next Ponzi scheme come tumbling down and who will be affected? Is it going to be someone in the oft touted Vanguard or one of the new robo-advisors popping up...Wealthfront? Betterment? Ellevest?

What can we as consumers do to arm ourselves? Well as far as I know, no one truly knows what anyone is going to do, but the US government does put some safeguards in place to try to keep us and our assets safe.  I did some research and this is what I found.

Who we are as investors?
In 2010, the SEC’s Office of Investor Education and Advocacy asked the Library of Congress’s Federal Research Division to prepare a report on behavioral traits of U.S. investors.  The Library of Congress report identifies nine investing behaviors that can undermine investment performance. These behaviors include: active trading; the disposition effect; focusing on past performance and ignoring fees; familiarity bias; manias and panics; momentum investing; naïve diversification; noise trading; and inadequate diversification.


How to invest wisely?
The SEC recommends you ASK QUESTIONS. Per the SEC, we see too many investors who might have avoided trouble and losses if they had asked basic questions from the start. We encourage you to thoroughly evaluate the background of any financial professional with whom you intend to do business—before you hand over your hard-earned cash. It doesn’t matter if you are a beginner or have been investing for many years, it’s never too early or too late to start asking questions. It’s almost impossible to ask a dumb question about how you are investing your money. Don’t feel intimidated. Remember, it’s your money at stake. You are paying for the assistance of a financial professional. They should be prepared to answer your questions.


How do I do a background check?
If it's someone recommended to you by a friend or family member ask them about their experience with this person. Do they get statements? Are there returns too good to be true? Is it easy to reach the advisor? Does this advisor target only a certain group of people? Are they registered with the state? What training and experience do they have?

If you're in the FIRE world, or use online services, these and others are still questions you can pose. You can search the founder of the investment firm. If your employer has a 401k, the Prospectus that comes with it lists the fund manager. You can verify your broker’s disciplinary history by checking the Central Registration Depository (CRD) or by doing a broker check. Either your state securities regulator or FINRA can provide you with CRD information. Researching investments is part of an investor’s due diligence. Also, you should know that if your financial professional or his or her firm goes out of business or declares bankruptcy, you might not be able to recover your money—even if an arbitrator or a court rules in your favor. Do your research!


Research tools:
Ask and Check - Research Investment Products and Professionals
Using EDGAR - Researching Public Companies
Using EMMA - Researching Municipal Securities and 529 Plans
FINRA Fund Analyzer - The Fund Analyzer offers information and analysis on over 18,000 mutual funds, Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs).  This tool establishes the value of the funds and impact of fees and expenses on your investment and also allows you the ability to look up applicable fees and available discounts for funds.

How to Read a Mutual Fund Prospectus
Part 1 of 3:  Investment Objective, Strategies, and Risks
Part 2 of 3: Fee Table and Performance
Part 3 of 3:  Management, Shareholder Information, and Statement of Additional Information

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Comments

  1. This is why I have never got as far as investing in individual stocks. I'd like to for the dividend income but analysis paralysis comes along. too much info and unable to work out what is what.

    I invest in Vanguard trackers as I deem in my unprofessional, inexperienced way that this is a good enough route. No financial adviser though, cut out the middleperson.

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  2. Tuppenny! Sorry it's been so long. Blog finally unblocked on work internet for being too new! #milestone. So Vanguard is definitely a FIRE fave but those index funds are still funds. And funds have managers. And managers are people. And people are well....

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    1. I know! I just don't have the confidence to identify and buy individual stocks. Someone mentioned Investment trusts to me today.

      See too much info and choice!

      We're not allowed to use internet at work at all. Or rather rules relaxed a tiny bit but you need to clearly show you are not working, have signed out on your flexi sheet etc etc. Not worth the hassle of questions being asked so I never touch anything but work stuff at work. Don't even use work's new wifi for my phone. Me paranoid? Never!

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    2. Haha...wow yeah I know some work places can be really strict. When I first started at my current job, we had few restrictions on the internet. But with the rise of phishing scams and ransomware, many sites are blocked. We do a lot of internet searching at work, so I'm on the internet all day basically. Were it not for this, I may never have found FIRE!

      As for investing, my next action items were made in March for a June action date just to a) get out of decision paralysis and b) sleep on it...for 3 months. Right now, I haven't started with Vanguard yet...baby steps. After the first few weeks in the FIRE world were not going as planned ...I think I'll wait a year. More than likely I'll change my allocations with my 401k since that's just a few clicks (future post). Great seeing you here, Tuppenny!

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    3. Hmmm.. Am not sure I approve of you waiting a whole year :-) 3 months? yes. Sleep on it? yes. A whole year? No.

      You might be able to invest in Vanguard via your 401k. And once any savings vehicle is set up it should all be a matter of a few clicks. Just got to set them up.

      As regards to paranoid employers - that would be the UK government! At least in my current role the internet is part of our job. Unfortunately we are still seeing people being sacked because they have accessed inappropriate content/taken the P with their personal usage. As a manager I feel I need to be squeaky clean so just don't go there. I have internet at home so happy to wait until home time.

      Look forward to your 401k post - it will probably be another foreign language post for me - similar to your medical bill post :-)

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    4. Oooh I love it. Honesty! Well, Not going Vanguard does not mean I'm not investing. I'm just doing a robo-advisor for now. It's what I had signed up with right before I started My Early Retirement Journey. It's hands off and everything is finally auto-depositing there so I don't want to mess up my groove. Vanguard is not quite as set it and forget as robo-advisor. I want to see how my first year as an investor goes first. I'm def baby steps with hard-earned money. I do notice Vanguards fund all over my portfolio though. Also, I said I'm going to try my hand at selecting a vanguard fund from my 401k... it's only 2 clicks... somehow it seems more safe-guarded because the choices are limited and somehow I feel like if I did something wrong, my employer or the company would alert me. If that goes well...then I'll feel more at ease to try to hand select a fund directly from Vanguard.

      Do you do a target date fund with Vanguard or do some handy stock/bond allocation with the index funds?

      Also people lose their jobs for visiting sites they have access to??

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  3. Because I get analysis paralysis I went with Vanguard LifeStrategy funds. Mainly the 60% one but do have a few pennies in the 80% fund - was obviously feeling brave that day! 60% is the equity allocation, the remaining 40% is bonds. A reasonably balanced allocation bearing in mind we are further along our journey than yourself.

    Now if robo-investors had been around and mainstream 10-15 years ago I think I would have gone with them as well. I guess the LifeStrategy funds are similar in that I just dump my money into the one fund and it gets distributed amongst a chunk of other Vanguard funds.

    And being sacked for visiting sites you have access to? Oh yes! Media policy is must not use internet for personal use on company time. It's less about the sites and more about the 'theft of company time'. In fairness the people I know who have been sacked really were taking the P!

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  4. OMG! They don't have that here (at my work). They say something like be responsible about it because we understand you're an actual human.

    Glad I got the TF seal of approval for robo-advisor.
    Also not sure what the LifeStrategy Funds are. I only know mainly what the FIRE-bloggers post about... the Total Stock and Total Bond funds. But 60/40 sounds about right for your particular mile marker in the Journey, at least according to the traditional rule of thumb.

    Curious if you adjusted that allocation yourself over time?

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  5. LifeStrategy are basically a basket of Vanguard funds that are global so a bit of everything they offer. I only invested in active funds prior to finally getting into Vanguard and that was UK only so not good. Nor did it have any bonds. No adjustments but before Vanguard we were heavy in cash so allocation wasn't really necessary.

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