Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Thursday, March 25, 2010

High Returns Could Be a Red Flag

When we help clients develop their investment strategy, we always emphasize that higher returns are typically accompanied by higher risk. It is important to keep this fact in mind when considering new investments that seem to provide an unusually good return.

A case in point that illustrates how important this is was just published in the Sarasota Herald Tribune on March 19th. (A similar scheme was reported about two years ago in Sarasota.) According to the Tribune’s article, “….. many elderly investors were persuaded to liquidate annuities on the false promise of a guaranteed investment yielding 7% annual interest. They were told that ‘100 percent of your money goes to work for you’, when in fact funds were diverted to personal use, consulting fees, salaries paid to the defendants and sales agent commissions, according to the arrest warrant.” The article went on to say that the defendants: “attracted business with advertisements that touted high-interest using government-backed certificates of deposit. But when investors walked through the door they were steered instead to high-risk unregulated securities.”

It’s not unusual to see ads in the newspaper offering very high-paying CDs. We suspect that more often than not, the CD offer is merely a come-on to get investors attention. Once in the door, a switch is made to a high commission product or in some cases as in Sarasota, to some type of fraudulent product.

Another approach to be wary of impacted Michigan investors a couple of years ago. Investment seminars are offered, free of charge, as a way for investment advisors to acquire new clients. Often, a nice lunch or dinner is included at a well-known restaurant. Several years ago my wife and I received an invitation to a seminar at a nearby restaurant. One of our friends had mentioned that he had attended an earlier seminar by the same advisor. We decided to attend to see what the individual had to offer. It was a fast-paced presentation with slick slides and humor. There was little time for any in-depth questions. We were reminded of the loud, car commercials you often see on TV.

What was even more interesting was the fact that his literature stated that he had been a member of the Certified Financial Planner® (CFP) Board of Standards. I thought that to be a bit fishy since he didn’t claim to be a CFP practitioner. After checking to see if he was listed on the CFP website, it was clear he was misstating his qualifications. I was not surprised to learn later that the individual had been named in an investment scam lawsuit and was under investigation. Investors had been taken in a “Ponzi” scheme not much different than other Ponzi schemes of late. Many of his clients reportedly lost their life savings.

It’s very important to determine the background and qualifications of anyone you trust with your money. If it sounds too good, it most likely is. As the old saying goes: “There’s no such thing as a free lunch!” (Or a free dinner, for that matter)


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