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!
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