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Avoiding "Madoff"

"I am looking for a financial advisor. My wife and I have two kids, two homes, and a little saved for retirement, but not much.  Any suggestions on how to find a financial advisor who won't "Madoff" me?"

I hesitate to post your question because it may appear rather self-serving but the answer is very important to many people out there.  For that reason, I will field your question.  I am not sure your experience of working with or interviewing financial advisors.  When you meet with any potential advisor, the first thing you must ask is how they get paid.  The type of advisor that you want to work with will refer to themself as a fee only financial advisor.  This means that they only receive compensation from their clients.  Out of respect for the other advisors that may refer to themselves as fee based (which is very different), I am not going to go into the list of conflicts of interest that they inherently face based on their compensation model.  Just know that fee only advisors have chosen their business model in order to avoid these conflicts of interest.  We all believe that since the client is the only one paying us, they are the only one we work for.

In order to find a fee only financial planner near you, go to www.napfa.org.  There you will be able to search under your zip code for fee only planners in your area.  You will find that in majority of the cases, these businesses were started by one or two individuals.  There are very few large fee only planning firms to choose from unlike the big business alternatives.  Most clients that work with us prefer this because they receive personalized service that is in their best interest.

As far as your Madoff point, a little common sense goes a long way.  For instance, if an advisor asks you to make out a check to him or herself or company and says that they will deposit it for you and buy investments with it—this should be a red flag.  Though there may be concern that most of us fee only planners are small businesses, we do not ever have access to your money.  Instead of writing a check to us, you would write a check to our custodian (Scottrade, Charles Schwab, Fidelity, etc.) and write right on the check “for the benefit of Donnie J”.  These are huge institutions that we use to invest your money, without being able to withdraw it.  If you are paying for your advisor to manage your money, you may authorize the custodian to allow your advisor to take the fee straight from your account.  This is common practice, but if you have concerns, you do not need to enable this feature.  In this case, you would need to write a check to your advisor to compensate them for their services as agreed upon.

Also of note, you will see when you login to these institutions all your accounts, investments, and balances.  None of this was the case with Madoff’s clients.  Madoff and/or Madoff’s company were the only one producing statements.  Without the third party custodian, these were very easily falsified.

Finally, advisors are all trained not to guarantee anything when it comes to investments.  If someone is guaranteeing you something, especially if it is too good to be true—stay away.

I also want to clarify that by no means am I claiming that any advisors other than fee only advisors are more or less likely to be a part of a “Madoff” scam.  I merely started this discussion talking about fee only planners because you mentioned you are looking for a financial advisor, and I feel very strongly that fee only is the only way to go.  I appreciate different opinions on this but wouldn’t have started a fee only financial planning business if I didn’t feel strongly this way.