Help Protect Yourself from Bad Investments

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You’ve probably seen the current news about unethical and illegal sales practices by Wells Fargo and other banks. You probably also receive many invitations to “free lunch” seminars on financial and retirement topics. It’s abundantly clear that families have to be more careful than ever about being led into expensive and unsuitable investments that are hard to get out of.

Although the restaurant menu on the invitation may be tempting, remember that “There’s no such thing as a free lunch.” Here are some key strategies and important questions that can help you avoid a costly mistake.

Promise yourself not to purchase anything or open an account on the spot

One strong indication that the “financial advisor” is actually an aggressive salesperson is that they will want you to act immediately and make a commitment right away. Making a financial purchase is an important decision that could affect you for years to come. Don’t be persuaded to rush into it. Would you trust a doctor who urges you to go into surgery without knowing anything about you, or doing any tests? Get a second opinion from a financial professional you trust, and then proceed.

“What kind of investor is this product good for? Who is it not good for?”

Everyone’s circumstances, financial needs and goals are different. If the “financial advisor” replies that the investment is good for everyone, it should be a red flag for you. An investment or strategy that is ideal for one person can be a disaster for another person who has different objectives and tax sensitivities. If the advisor doesn’t take the time to find out about your unique history, financial condition, and hopes and dreams, he or she is more focused on the sale than on you.

“Are you a fiduciary?”

A fiduciary is someone who, in order to keep their licenses and designations, must always act in their client’s best interest. In other words, they cannot sell you a more expensive, poorer-performing investment with worse features because they will make a higher commission, or to satisfy the sales goals of their broker-dealer, bank, insurance company or wire house. They must provide clear and full disclosure of all important facts, and avoid conflicts of interest. Attorneys, CPAs and Certified Financial Planners™ must act as fiduciaries.

“What does it cost initially, and what are the additional or ongoing costs?”

Some sales people will swear, “It doesn’t cost you anything!” This should set off warning buzzers. The sales person has to pay for the “free lunch” and his business overhead, and make a living as well. If the financial product is “free” it can often mean that you’re paying a lot in ways that the sales person is not disclosing. This can be through high internal expenses, onerous penalties for early withdrawal, and restricted access to your funds, among others.

“How liquid is this investment? Are there penalties or fees when I cash it in?”

The devil is in the details, which may be in fine print, buried in the sales material. Some investment products, at the discretion of the company, are allowed to suspend withdrawals, or allow distributions only if you become disabled or die. Some financial products have a “surrender penalty” (penalty for early withdrawal) that can be as high as 15 to 20%. These penalties can last a long time, or never go away. Unfortunately, many of these are marketed to seniors. One of our clients purchased this kind of product at her bank, and only found out later that she would have to be over 100 before she could cash out her investment without penalty.

“Is this investment registered? With which regulator?”

For your protection, your investment (and the financial advisor) should be registered with one of the regulatory organizations. Some examples are the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA) and the State Insurance Commissioner. These bodies make sure that any investment that is approved by them meets strict standards. There are many horror stories of people who bought into an unregulated investment, received only a promissory note in return, and lost all their investment in a Ponzi scheme.

If the “financial advisor” in front of you cannot answer all these questions to your satisfaction, the investment may not be right for you. Do your due diligence investigation, and get a second opinion before you make any commitments or sign any documents.

The commentary on this website reflects the personal opinions, viewpoints and analyses of Kondo Wealth Advisors, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc. or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.