Chances are you now hesitate before you hand over your money to a financial adviser or investment manager. Your stomach lurches. Your head aches. Could this person be another Bernard Madoff? Could he, too, be running a multibillion-dollar Ponzi scheme, taking in smart people like Steven Spielberg or Kyra Sedgwick or you, all while keeping the demeanor of a nice old grandfather? Wouldn’t you be better off just plowing your nest egg into Treasuries and calling it a day?
For the record, the answers to those questions are: Yes, there are other fraudulent money managers doing business; yes, they could be robbing you blind; no, you would not be better off putting everything into Treasuries. Midlife women tend to be risk-averse enough, thank you. Putting your money into ultrasafe securities would practically guarantee that your portfolio would not keep pace with inflation. Instead, you need to soothe your fears with information.
Let me say up front that every investment carries some degree of risk. We all lost money in the stock market last year, and we’re bound to lose more in the future. Going forward requires a certain amount of faith and a sense of self that doesn’t fluctuate with the ups and downs of your portfolio. And of course when it came to Madoff, plenty of people (ahem, the SEC) were fooled. Some even lost money through no clear fault of their own; they’d invested in a feeder fund, for instance.
But many more had neglected basic investing rules: They relied solely on the recommendations of friends without checking on Madoff themselves, and they turned over a substantial percentage of their money. Now, even if that was you yesterday, starting today you are going to be smarter. You are going to ask more questions and be more skeptical. Here’s how to find a financial adviser you can trust.
Cover the Basics and Ask the Right Questions
It’s fine to get the name of a broker through a friend — I’m told that’s how most people develop their short lists. But that’s where you begin, not where you end. Next stop: the Web site of the Financial Industry Regulatory Authority. At finra.org, you’ll find a database of brokers and brokerage firms (click on "BrokerCheck" in the Investors section). You’ll get information on licensing, how long an individual has been in business, and whether she has a history of disciplinary enforcement.
If the person you’re thinking of hiring is an investment adviser or manager, not a broker, then you want to look at her Form ADV, which is used to register with either the Securities and Exchange Commission or the state securities regulator. The form has two parts: Part one includes information about the adviser’s education, business, and disciplinary history within the last 10 years; it’s available online at adviserinfo.sec.gov. Part two notes the adviser’s services, fees, and investment strategies, and must be requested directly from her. Make sure you read all the way through — Madoff’s investors would have had to click through 10 pages in part one of his Form ADV, then scroll toward the bottom of the "Disclosure Information" page before they could see that Madoff answered yes to a question that should have raised concerns.
Once you’ve narrowed your list of advisers, interview them in person (more on that in a moment). For each one, you want to know exactly what services she offers and how much they’ll cost, how she would invest your money, and whether she can respect your capacity for risk (whatever that is). But also ask: Who is your auditor? Eyebrows everywhere should have gone up at the fact that bigwig Madoff was using a tiny accounting firm. "The size of the auditor should be commensurate with the size of the investment firm," says William Procida, an investment adviser in New York. If the firm is not a household name, like PricewaterhouseCoopers, check to make sure they handle other big clients.