What I learned from being victimized by email virus that hijacked my email
This morning my personal Yahoo account was hijacked and sent out spam without my permission. I had mistakenly clicked on a link that someone sent me. The link purported to be an article on msnbc about jobs. Never ever click on a link someone sent you. Never give in to the desire to quickly satisfy your curiosity. Instead try to find the link through Google. There is simply too much risk of a forged email sending a cleverly camouflaged bogus web link that uploads a virus.
In the world of investing consumers suffer a similar problem: investment products are sometimes carefully packaged to camouflage hidden fees, early withdrawal penalties, poor performance, etc. So investors need a guide who can quickly spot the problem in the fine print and provide clarity.
I found a mutual fund that claims to be an “Institutional” class fund. This implies no early redemption fees after a reasonable period. Yet the fund had a 2% redemption fee that never expires, which is very unusual. This fee was not calculated by Morningstar in terms of how it affects the total return so this boosted the fund’s alleged returns, making the fund look like a top performer, thus luring in buyers who had to pay the fee when they sold. It was a top performer – in terms of tricking people! The fund even got recommendations in the news media from reporters who didn’t see the trick. (Really reminds me of a virus).
Another fund, a “closed –end” fund, was issued new at $20 with a 1$ a share underwriting fee and an NAV of $19. So the fund basically was sold at 5% more than it was worth so that the issuer could get a 5% commission. Yet consumers may see this as commission free except for the $9 fee they pay a broker to buy this. That is wrong. The fund industry then maintains a market in this for a few months to prop up the share price at the initial IPO. Later during the Lehman crash it fell to $7 a share.
I have written an article “Accounting gimmicks hurt investors”.
Investors should seek independent financial advice.
I can’t believe it happened again!
First in December, 2008 Madoff’s gigantic Ponzi scheme collapsed. It used a one person CPA auditing firm. Had the audit been done correctly the Ponzi scheme would have been detected. I have no evidence as to whether the auditor was honest and dumb or was dishonest. Now Peregrine Financial Group, a futures broker went bankrupt this week due to fraud. It too was audited by an obscure one person CPA firm. The chief executive of collapsed brokerage firm was arrested Friday. The Broker's weak quality risk controls helped to allow this problem to occur. It's shockingly similar to the MF Global brokerage failure of October 31, 2011.
The lesson investors must learn is to lookout for themselves and be suspicious of investment firms. They need to get their own set of risk controls at investment firms.
First, demand a separation of duties which is a basic accounting technique to make it harder to commit fraud. This means that you have one firm act as Custodian for your investments and hire another firm to be the advisor that picks the recommended investments. The advisor should be a Registered Investment Advisor (RIA) licensed by the state or federal government. The advisor who uses a Custodian to hold assets does not get to have custody over your investments, he or she merely gets to execute trades for your assets that are held at a custodian.
Second, the advisor should be fee-only so that he is not under pressure to recommend products to meet a sales quota. A fee-only RIA is not allowed to get a kickback (referral fee) from anyone, which increases the odds that he will act exclusively in your interest. The advisor should have a simple financial life with no side jobs or other business ventures. Perhaps investors should ask their advisor “Do you have excessive debts or a bad credit history or any unpaid liens, etc. What's your credit score?”
Third, it is best to confine investments to publicly traded securities and insured bank deposits as these can be easily audited by the auditor. By contrast, owning a closely held business or real estate with others in a partnership is harder to audit and easier for a dishonest person to manipulate or to simply run up exorbitant compensation expenses. Unfortunately the futures trading industry seems to have inadequate investor protection in place.
Fourth, the Custodian should either be a large, well known firm or clear through a large, well known firm. A possible alternative would be for the advisor to simply give advice and then the client executes the trade in his own retail account, although that will have problems with access to the lowest cost Institutional class mutual funds.
Fifth, review your rights under SIPC insurance $500,000 limit per investor and see if you can structure things to be insured by SIPC. For example a husband’s and wife’s IRA’s are counted as separate from their taxable accounts, so they could have $500,000 each in an IRA and a taxable account and get SIPC coverage.
Find out what the SPIC insurance limits are for your various accounts.
Six, avoid buying obscure microcap stocks. If you insist on owning them then use a mutual fund to buy them. Occasionally fraudsters have manipulated microcap companies and the larger a company is the less likey that this can happen.
I wrote an article “Is your financial planner a fiduciary?” and “Broker failure highlights need for vigilance”.
Investors should seek independent financial advice.