In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers part 2 of Chapter 12 of the 2nd edition of the book titled, “Whom To Listen Too.” Part 2 covers "Interviewing Advisors and Avoiding Fraud."

If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon.

Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.

Chapter 12 (Part 2) – Podcast Script

Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. Fee-only means no commissions. I’m also the author of Control Your Retirement Destiny, a book that shows you how to align your finances for a smooth transition into retirement.

This podcast is an extension of the material in Chapter 12, on “Whom To Listen To”. I’ll be covering the topics of avoiding fraud and how to interview potential advisors.

If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help.

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We’ve all heard the saying “if it’s too good to be true….” So why do we fall for fraud, over and over? I think I know the answer.

To recognize if something is too good to be true, you must know what truth is in the first place. And when it comes to investing, a lot of people have no idea what is realistic and what is a fantasy.

By the end of this podcast, you will not be one of those people. I’ve got several real-life stories to tell – stories about fraud and why people fell for it. You are about to learn what to watch out for. And as a side note – for the personal stories I tell I change names and details for privacy reasons. Although details are changed, the substance of each story is true.

Let’s start with the biggest financial scam in U.S. history – what is known as the Bernie Madoff scam – a 65 billion-dollar Ponzi scheme. If you haven’t heard of him, Bernie Madoff was the former chairman of the NASDAQ stock market. Naturally when he started his own investment firm, people trusted him. His scheme came unraveled in December 2008 and many families lost their entire life savings.

One of the men credited with bringing down Madoff’s scheme is Harry Markopolos. He tells his story with his co-author Frank Casey in their book called No One Would Listen: A True Financial Thriller.

How did Harry Markopolos figure out Madoff’s scheme? Markopolos said, “As we know, markets go up and down, and Madoff’s only went up. He had very few down months. Only four percent of the months were down months. And that would be equivalent to a baseball player in the major leagues batting .960 for a year. Clearly impossible. You would suspect cheating immediately.”

Maybe Markopolos would suspect cheating immediately, but would you? Harry Markopolos was in the investment business. He knew what is and is not possible. But what about the average person who walked into Bernie Madoff’s office and was told that they could consistently earn 12% returns each year? Any one of us in the investment business would walk out and head to the authorities. But the average investor? They think that sounds great and that someone has the magic formula to make it happen. They don’t know that they should suspect cheating immediately.

How can you assess what is realistic and whether someone is lying? First, you must understand that safe investments earn low returns. If a proposed investment pays more than a money market fund or more than a one-year CD, than there is risk. If someone doesn’t explain those risks and tries to assure you that your money is completely safe, they aren’t telling the whole story. You also must know that volatility, or ups and downs, are a normal part of investing. If someone tells you it will be a smooth ride with great returns, watch out. Something is not right.

Despite the publicity that the Madoff scandal received, Ponzi schemes continue and people continue to fall for them. Most recently, a New York Times article chronicles “The Fall of America’s Money Answers Man” which is the story of Jordan Goodman, a well-known finance guru who has books and radio shows.

As Goodman’s work became more popular, he began touting all sorts of investments and was being paid to promote these investments. That is not illegal, as long as it disclosed. But he wasn’t disclosing all these relationships. And, on one of his radio shows in about 2014, Goodman began talking about one particular investment where you could safely earn 6% returns. He was quoted as saying “There’s a way of getting 6 percent and not having to worry about capital loss. It’s very safe.” This investment he was promoting turned out to be a Ponzi scheme.

How could you recognize that this was a scam? After all, maybe 6% doesn’t sound like a return that is too good to be true? Well, it’s all relative. In 2006, you could earn 6% in a money market fund, but in 2014, you were earning about zero in a money market fund. And in today’s low interest rate environment, you might earn 2.5%. So, if someone is promising a safe, stable 6% no-risk return, you should be skeptical. And if you do decide to go forward with such an investment, you most certainly would not put in more than 5-10% of your money.

As a legitimate investment advisor, my job is to provide people with a realistic set of potential outcomes. What happens when I compete with someone who is lying? It’s hard.

I can present all the logic in the world, but when some unscrupulous advisor promises bigger returns with no risk, it is often with a sense of helplessness that all I can do is stand by and watch someone lose money.

In 2007 I watched one of my clients get sucked in by this kind lie. He came in for our annual meeting about a month before he was supposed to retire. He told me he wasn’t going to need to withdraw money from his IRA as we had planned.

“Why?” I asked, intrigued.

He replied that he’d invested $100,000 in a currency-trading program that was paying him $5,000 a month. He showed me the checks he had been receiving. I got a sick feeling in the pit of my stomach. I knew the math didn’t add up. At $5,000 a month, that’s $60,000 a year, on a $100,000 investment. No one can deliver those kinds of returns. But how do you explain this to someone who has checks in their hand?

Within six months, the currency trading program he invested in was discovered to be a scam, and the perpetrators were arrested. I wasn’t surprised. After netting out the checks he received, and the tax deduction for the fraud loss, he ended up about $50,000 poorer. Luckily, the rest of his retirement money remained invested with me, in a boring balanced portfolio of no-load index funds, so his overall retirement security wasn’t affected.

Another thing scam artists do is appeal to your ego or to your religion – or both. I saw one former client of mine lose $4 million to such a scam.

After working together for several years, this client sent me a wonderful email letting me know how much they had appreciated working with me, but that they were moving their funds to a firm that shared the same religious affiliation as they did. This firm also told them they would have access to exclusive investments only available to high net worth individuals. There’s the ego appeal. And, the firm told them it would handle everything: legal work, accounting, and investments. In hindsight, this makes sense. It keeps other expert eyes from questioning what is being done.

A few years later, this client came back in to see me with a stack of papers in hand, asking me to help figure out what had happened to their money. I read, and I read some more. I turned white as chalk as I kept reading. Four million dollars—nearly all of their money—was gone. I immediately sent them to see an attorney who specialized in these types of cases.

How did this firm scam the client out of 4 million? They got them to sign a series of promissory notes. The notes were supposed to pay 10 – 12% returns and the money was going to be used for real estate development. The client signed the notes, wired the money, got a few interest check payments and that was it. They were told the real estate development floundered. I don’t know what really happened or where the money really went.

What I do know is the client’s lifestyle was forever changed.

How can you avoid such a scam? Well, legitimate advisors won’t ask you to sign a promissory note. Instead your money is placed with a reputable custodian like Charles Schwab, Fidelity, or T.D. Ameritrade. A custodian reports directly to you.

For example, my firm uses Charles Schwab as our primary custodian. We can initiate transactions, but Schwab reports those transactions directly to the client. We have no ability to make up what the account statement says. In the cases we have discussed so far there was no third-party custodian. So the advisor could make up what the statements said and what they were reporting to the client.

Con artists are skilled at finding people who are trusting and vulnerable. You may be savvy, but what about your spouse? This is another real-life case of mine. The story of Henrietta, who was referred to me by her CPA after her husband passed.

Henrietta and her husband Frank had an impressive collection of original art-work worth millions. Frank passed away when Henrietta was about 78 years old.

Frank and Henrietta had a long-term friend from the art world named Sam. Sam reached out to Henrietta after Frank’s death and offered to buy her art collection. Henrietta didn’t seek legal counsel because she’d known Sam for a long time. Why would she need an attorney? She trusted him.

They negotiated a purchase price of $3 million to be paid to Henrietta on a schedule of $25,000 a month for the next 10 years.

The checks arrived for about two years, then they suddenly stopped. Sam was nowhere to be found. Henrietta was finally able to track him down, at which time he told her he was going through financial difficulties, and that he would send her money as soon as he could. She waited. A few months later he sent one additional payment. Then nothing more.

It wasn’t until she hadn’t received a payment for two years that I was able to convince Henrietta to hire an attorney and pursue litigation. She kept telling me that Sam was a friend. She wanted to give him the benefit of the doubt. Henrietta was now 82. Of course, she didn’t want the hassle.

Eventually, Henrietta was able to recover about $1.5 million. I don’t believe she would have gotten any of that money back if I hadn’t encouraged her to take action. And I believe the family friend was counting on the fact that Henrietta was older and would just let it go.

How can you avoid such a scam? Early in retirement establish solid relationships with accountants, advisors and attorneys that you trust. And if your spouse is not involved in the finances, you still want to make sure they will know who to turn to.

The last story I want to tell is a story from my own family. The story of Aunt B, my dad’s aunt. Aunt B, at age 94, was a spirited and intelligent woman. She’d had a fulfilling career as a professor, had never married, and had managed to save a significant amount of money.

Over the past few years, her hearing and sight had become impaired, and a medical condition developed which meant Aunt B needed 24-hour-a-day in-home care. Aunt B did not want to use an agency to provide care. She lived in a small town in rural Iowa and wanted local help. She found a group of three young women willing to provide in-home care services. They started coming around to stay with her regularly.

My dad had power of attorney over Aunt B’s financial affairs and lived about 15 miles away. The first problem arose when Aunt B decided it would be a great idea to write a $60,000 check to help a local failing business stay afloat. Dad investigated—and overruled. Aunt B was furious. We found out later that the business was owned by the spouse of one of the caregivers.

Dad continued to investigate and soon realized that the three caregivers had managed to drain over $300,000 out of Aunt B’s accounts within a matter of months.

When Dad tried to explain the situation to Aunt B, she became angry and adamantly defended the actions of her caregivers.

Dad brought in the police and an attorney. Despite clear explanations, Aunt B insisted that the caregivers were only going through a “naughty spell,” and that they should be forgiven and rehired.

The attorney, who was familiar with these types of cases, explained to us how these situations develop. Homebound people often forge close bonds with their caregivers. The caregiver becomes the eyes, ears, and primary news source for the homebound person and can exert great influence. The caregivers can screen phone calls, mail, and outside information, so their patient is only exposed to the information they want them to see.

Aunt B was nearly blind. They would present her with checks to sign which were supposedly for services like lawn care or house cleaning. She would sign the checks, which, in reality, were often made out directly to the caregivers. They also ordered new appliances, tools, and other household items, all delivered to their own homes, not to Aunt B’s.

To perpetrate their fraud, they convinced Aunt B that Dad was out to get her money. Each time he stopped by they would tell Aunt B that he was only there to look out for his own future inheritance. They had even talked Aunt B into changing her will to make the primary caregiver the main beneficiary. Luckily that was later remedied.

The scam would never have been discovered if Dad didn’t randomly stop in at Aunt B’s, ask questions, and poke around, even when she did not want him to.

Unfortunately, because this type of crime is not a violent crime, the care-givers received a sentence that is about equivalent to being on probation. They could easily be back out there, doing the same thing today.

We also learned from the attorney general that these care-givers had prior records and likely learned their techniques in prison, as strategies on how to defraud the elderly are passed along among the incarcerated. Someone trained to swoop in can do serious damage in a matter of weeks—then they vanish.

How can you avoid a scam like this in your family? Check in on your elderly family members. Get involved. And insist on back-ground checks even if the care-giver is part of your local community or referred by someone you know.

Before I wrap up this podcast, I want to cover one more thing - the topic of interviewing advisors. What questions should you ask? I’ve had prospective clients come in with a checklist where it was evident they didn’t know what they were asking. But at least they had done a little homework and arrived with some sort of screening process.

In the last podcast, we covered the basics on advisor credentials and compensation. I’d suggest you don’t even meet with an advisor unless they pass your basic screening process – which you can do before you meet with them. So, when I talk about interviewing advisors, I’m not talking about questions such as what credentials do they have. I’m assuming you already screened them and now you’re down to a final round of interviews with those who passed the screening process.

So, you’re interviewing, and you need to determine if this person is a good fit for you and your family. There are two questions I think are key. These two questions help you gauge the financial advisor’s communication and planning style.

The first of those questions is, “What assumptions do you use when running retirement planning projections?”

All financial-planning projections are based on assumptions. There are assumptions about the rate of return, the pace of inflation, taxes, and much more.

If an advisor runs a financial plan projecting your investments will grow at 10% a year, you might have a problem. This assumption makes the future look rosy, but it’s probably make-believe. You need realistic projections to make appropriate decisions.

You want to find someone who uses a conservative set of assumptions; after all, you’d rather end up with more than what is projected on paper, not less.

All assumptions must be adjusted according to your personal circumstances and changes in the general economy. With that in mind, I am going to walk through a short list of what I consider realistic assumptions. For investment returns: Projections using returns in the range of 5–7% a year seems realistic in today’s environment. For inflation: your living expenses should be projected to rise about 3% a year on average, or maybe a little less if you’re already retired and have a higher net worth. Real estate assets such as your home may go up in value about 2–3% a year on average. And tax rates should be customized to you. For example, if you have a large sum of money in retirement accounts, you will pay taxes on that money as it is withdrawn. That puts you in a completely different tax situation than someone who has a large sum of money that is not in retirement accounts. This needs to be considered when running financial-planning projections. There are of course many valid reasons to use assumptions that may vary from my guidelines. Your job as the customer is to ask what the assumptions are and to question things that seem unrealistic.

The second question I like is asking the advisor to explain a financial concept to you.

You want to work with someone who can talk in language you can understand. If an advisor speaks over your head, or their answer makes no sense and they do not respond well to additional questions, move on.

Here are a few concepts you should have learned in this podcast series that you could inquire about. You could ask: What do you think of index funds? Or how do you determine how much of my money should be in stocks versus bonds? Or how do you help me figure out if I should put my money in a Traditional IRA or Roth IRA? And ask how do you account for health care costs in my projections? You want to make sure you understand the answer that is provided. This is a good sign that you’re working with someone who can communicate in a way that you can relate to.

To wrap up today, when evaluating investments and advisors, always keep in mind:

There no such thing as safe stable no-risk returns that are higher than what you get on current money market funds. Your advisor would never ask you to sign a promissory note. Work with advisors that use large well-known third-party custodians. You should never make deposits to an entity that your advisor controls. And always interview advisors and work with someone who uses conservative assumptions and who takes the time to explain things to you.

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That wraps it up for this podcast on part two of Chapter 12, on “Whom to Listen To”. Thank you for taking the time to listen. In the Control Your Retirement Destiny book, I provide additional resources that can help you avoid fraud and interview advisors more effectively.

You can visit amazon.com to get a copy in either electronic or hard copy format.

You can also visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.