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5 Ways to Avoid a Financial Scandal

5 Ways to Avoid a Financial Scandal

May 29, 2021

It is really amazing to see financial scandal headlines every year in the media.  One would think, at some point, investors would get the real point – a “get rich quick” scheme is typically a “go broke” scheme in clever disguise.  The old saying “if it sounds too good to be true, it probably is” gets ignored to the hearers’ peril much too often.  Even some of the clients I speak with will occasionally mention a friend, relative or business acquaintance who seem to always have better returns on investments.

So how do you avoid either being duped intentionally or just simply making a bad (and often expensive) investment decision?

1.  Question your motives.  Why be concerned about everyone else’s returns?  You certainly want to generate fair returns commensurate with risk taken.  If you have a plan in place that follows a risk tolerance and investment strategy that historically meets your goals, why should Uncle Jim’s investment strategy and returns impact your plan?  There is an ugly name for this problem, greed.  Warren Buffet famously said he makes most of his money from other people’s fear and greed.  When others are greedy he is scared and when others are scared he is greedy.  

2.  Question your emotions.  The opposite side of the previous point is fear of investments that are not “guaranteed”.  Let’s be perfectly honest, very little in life is actually guaranteed.  A recent prospect interview illustrated how this thought process becomes very illogical.  This person railed for some time about excessive government spending, how the economy was going to crash and his general disdain of politicians ruining our country.  As we moved to discussing investments he basically desired FDIC or other government insured products although admittedly the returns would be too low to meet his goals.  Do you see the disconnect?  He wanted investments guaranteed by a government he obviously did not trust and had proclaimed was going broke!  If you don’t trust the government why not trust a well run company with a profit motive?  Fear almost always results in poor money decisions.

3.  Question the returns.  A common statement goes something like this, “I was playing golf with a friend last weekend and she doubled her money in six months on gold and silver”.  An excellent question to ask at this point is: “What is the annualized return for her portfolio for the past three and five years”?  Silence this time really is golden.  Unfortunately, investing is often treated like a casino.  How many people reveal how much they lose at casinos?  Not many, right?  Everyone seems to always win even though the very premise of gaming means the house must win more than it loses.  People eagerly talk of big wins but seldom big losses in investing.

4.  Question your plan.  The real question is, do you have a plan?  A couple of key points here.  If it is simply in your head, it is not a plan.  The very essence of planning is good documentation.  The second point is: failure to plan often means financial failure.  Very few people have enough income, inheritance, etc. to not plan for financial security.  Even if you do have a tremendous income, huge inheritance or strike oil on your property, a plan can assist how effectively the resources are managed.

5.  Question the salesperson and sponsor of the investment.  The internet can be a source of very good or very bad information at times.  However, a quick Google search can often lead to useful information.  At the very least it may lead you to the right questions.  A prime example occurred recently in our office.  A client was excited about an annuity contract that sounded great.  He was advised to take a cautious approach.  When he left the office, someone Googled the company.  Most of the results related to lawsuits for questionable sales practices.  Does that prove anything?  Absolutely not, but it should have generated a few more questions about the salesperson involved.  If asking a lot of questions causes someone to be nervous or evasive, grab your pocketbook and sprint the other direction.

You may say “this is all common sense stuff, no big deal”!  I agree, but reading a few financial news headlines makes one realize, common sense is not all too common.

Gary W. James  CFP®, CPA, AIF®
Financial Advisor