EPS 46 - The Ripple Effect: Advisor Fraud, Identity Theft, and Your Score

Fraud doesn’t always look like a Ponzi scheme. Sometimes it’s a smooth voice, a business card, and a “don’t worry, I’ve got it.” In this episode, Jerry unpacks how advisor misconduct happens—from misusing client funds to risky bets that go bad—and why the fallout can reach far beyond your portfolio and straight into your credit report. You’ll learn the red flags to spot, how to “trust but verify” with large vs. small firms, and the practical steps to lock down your identity and credit so one person’s bad decision doesn’t become your long-term problem. Empowerment = attention + action. 

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Transcript

SPEAKER_00: 0:01

The following podcast is for entertainment and educational purposes only. Remember to seek competent tax, legal, and investment advice that is unique to your personal circumstances. Hey everybody, and welcome to the Pink Bunny Podcast. I'm your host, Jerry Williams, and we talk about all things related to money from a gay perspective. And today I'm going to talk about two things that you might not think have much to do with one another: credit scores and financial advisors misconduct. Because they do, funny enough, do connect, and I'll show you how. But first of all, I what really prompted all this is I happened to go on to an article or find an article, I should say, that was a little bit strange to me, only in the sense that I hadn't heard this story before. But that doesn't mean anything really. But what happened was I guess there was a financial advisor or financial analyst who was one of those talking heads on CNBC. And apparently, you know, he they invited him on. You know, when you see these people, they come on and talk about all kinds of things, you know, get their opinion, their take on such and such, whatever. But what happened was this guy, he made a big bet against the market. Meaning, this was back when prior to the most recent election, and his belief was that with the current election that was going to happen, he thought that the market was going to crash and the economy was going to take a turn for the worst. And so what he did is he placed some big shorts, which is again a way of saying, hey, I think the counter is going to happen. And so you again, these are options that you buy, and I always really steer clear, tell people steer clear of options unless you really know what you're doing. Or you know, again, work with somebody who really knows what they're doing because they can be helpful, right? I mean, like calls, calls can be definitely helpful on your portfolio. A lot of good financial advisors will take a short position on something, or they will put like a straddle on your portfolio, again, depending on the circumstances and if they think that it warrants it. But it can act kind of like bumper rails, you know, or guardrails, if you will, on your portfolio. And of course, if you're a gambler, you can buy puts and calls to your heart's delight. And that's up to you. But I've seen lots of people get burned, really. I mean, even good financial advisors I've seen lose thousands and thousands of dollars by betting against whatever stock or whatever position they're taking. Because to me, the market is just very unpredictable, and you might win, but you might lose, and when you lose, often you lose big, and that's just a difficult pill to swallow. Anyway, so what I was what I was looking at is this financial TV analyst was a one-time fugitive because he was on the run for three years, because he was scamming his clients, and he was ultimately sentenced to five years in jail. But what happened was he made these bets on again the market and the outcome of the election, thinking again things were gonna take a turn for the worst, but it ended up being the opposite, and so he ended up owing lots and lots of money, and his clients lost lots and lots of money. And not only did he bet, you know, wrong against the market, but he had a difficult time covering those because he was taking money from his clients, and he was buying things like expensive cars and you know, using it their money for his personal expenses, and even expenses for the firm, all of which is totally illegal, illegal, and it's I mean, unethical at best, and at worst, like I said, it's illegal, and that's what it landed him in hot water and ultimately landed him in jail. But there's lots of other financial advisors that do really strange things, and I don't know, I suppose it's greed that really drives a lot of this behavior, because I ran across another paper that talked about this, and it's by Stanford University, and the author of this, I think I believe his name is Amikatu Saru, A-M-I-T-U-S-E-R-U. The date of this was a publication date, March of 2018. So what he did was he went in and looked at various firms with high rates of financial advisor misconduct, and then he ranked them. And he did this by firm, and he also did it by region. In a nutshell, I'm gonna say a lot of misconduct was predominantly back east, and that's where a lot of financial firms are really headquartered, or where you find such a large concentration of these people, because think about it, where's Wall Street, right? But the further you go towards the West, it doesn't mean there can't be financial advisors, registered investment advisors, etc. But you're typically not going to see the same concentration. And the difficult thing about this is this cuts across all firms, right? And that's really disturbing because you a lot of times you come to rely on what you would believe is going to be a solid financial firm that's gonna treat you right and the advisors are going to do their best for you. And I would say that is 100% true for the most part. But as we know, there's bad apples in every bunch, right? And there's just tons and tons of stories, unfortunately. Because when I think people are dealing with other people's money, the temptation for some people is just too much. You're looking at thousands or millions of dollars, and you start thinking, wow, I wish I had that. And hmm, well, if I did this, I could do this. And especially when you're working for a brokerage firm or what have you, you know kind of the ins and outs of what it takes to move money around and how to withdraw money, and what are the requirements that the business looks for, etc., etc. And a lot of it is not terribly difficult. Let's say if you're going to do a distribution or withdraw or redemption, what have you. You know, most of the financial advisors do these trades themselves. It's super easy. I mean, unless you're doing it yourself. So they go in, they place a trades, et cetera, and then they free up the cash. And then typically when the customer wants their money, then they send it to them by a wire transfer or check, what have you. But, you know, so it's pretty straightforward. But you can do all sorts of things because, again, you have the knowledge of what it takes to move money around, right? You can open separate accounts for them and you can do like a letter of instruction for the firm telling them what to do, et cetera, et cetera. And as long as there doesn't appear to be any fraud on the surface, then most likely they're gonna go ahead and do that, especially when the financial advisor is the one telling them to do this. And I'm talking about like the back office. So yeah, they try to dot their I's, cross their T's, of course, but for the most part, they're gonna believe that the financial advisor is doing the right thing. Plus, there's usually what they call a principal, which is somebody who oversees the financial advisor. Because everybody that is in any kind of investment company is a registered investment advisor representative to one degree or another. That means the FINRA or the SEC and both, you know, have their hands in running these organizations in terms of their compliance and are they doing the right thing for the right reasons, right? And so they have a principal who's like a 24 or 26 or whatever it is, and these people oversee again are responsible for the work that these other people are doing, not like their supervisor per se, right? That's someone who is gonna guide you, rate you, coach you, and give you feedback and you know, does your performance reviews and all that kind of stuff, right? That's really separate. Can they be the one the same? Yes. Can they be different people? Often. So, in that sense, the supervisor may not be the one that's keeping a very close eye or reverse. It may be the principal who's not doing their job and not keeping a close eye, and things slip under the radar, and next thing you know, there's a big problem that occurs. In this one instance, this was a dated March 27, 2005. Former financial advisor sentenced to 12 years in federal prison for multimillion dollar fraud scheme. Not good, right? Not good. Um, not good for him, and probably not good for his clients. So this one guy, and this is going back to the TV analyst guy, in it says early 2021, he solicited millions of dollars worth of funds from investors in the form of purported capital raised for Hercules, his firm, but misrepresented how the funds would be used and failed to disclose the massive losses Hercules previously sustained. As part of the capital raised, uh McDonald obtained$675,000 of investment and funds from one victim group. He misappropriated most of those funds in various ways, including spending$174,000 on a Porsche dealership, transferring$109,000 to the landlord of the home he was renting. You get the point, right? So he was not doing the right thing for the right reasons, and then he went on the run for a few years and then they finally caught him. But again, he's not the only one. This other guy that says here that he exploited his position of trust as a financial advisor to deceive both his clients and his employer for for personal gain. Says the FBI was looking into his activities and noted that he abused his position for financial fraud, and he did, again, lots of terrible things with his clients' money. Not, and I'm saying he misused it. That's really what I'm saying, not like he murdered someone. That obviously is totally different, but it doesn't matter here because I mean we all have heard those stories with like Bernie Madoff and those are Ponzi schemes where those people never got their money back, right? Or very little because they had to go in and he had to sell everything and try to get as much money you could from the firm, etc. etc, etc. And that's just a difficult thing to do, and it could take years, right? But back to the paper that I was reading from Stanford, you'd be surprised at the names of firms that have high instances of uh misconduct. And this is public. You can go out there and you can read this yourself. The publication is Misconduct Under the Microscope, Examining Bad Behavior by Financial Advisors. And you can go look this up and see for yourself. But um the firms, I'm just gonna read a few. I'll just go on the top five, but you know, these are well-known companies like Oppenheimer, First Allied Securities, Wells Fargo, UBS, National Planning Uh Corporation, Raymond James, Steve Stiefle, uh Morgan Stanley, on and on. Wells Fargo, I already said them. Anyway, and on the flip side, though, there are companies that have very, very low rates of misconduct. And chiefly one of them that doesn't have an investment firm anymore was USAA. And they were really well known for very ethical and highly competent employees, financial advisors, and they really prided themselves on their ability to retain and work in the best interests of their clients. So they were known as a trustworthy organization, and their financial advisors, you know, acted in the best interests of the clients because they did not gain anything from advising or buying and selling in a person's portfolio. They were paid straight salary. So whether the client hit it big or barely broke even or took a loss, none of that affected the financial advisor's pay. Now, some advisors, not necessarily at that firm, but some advisors, if they sell you something, then they are gonna get paid. There's a lot of like loaded mutual funds that have B shares, etc. And that's how they get paid when they sell you something, then they receive you know a cut or a you know, the firm will pay them a certain percentage, whatever it is. But almost all, as far as I know, and I would say this is just really common, is by and large, all financial advisors have a fiduciary responsibility to you, and that means again that they're supposed to act in your best interest, they're not supposed to put their interests ahead of yours. We know human nature is sometimes get the gets the best of people, right? But by and large, that's what they're supposed to do. And that really behooves you to ask questions when you speak with somebody about how they are getting paid, and they should show you and tell you. And you can take a look and you can see, like on broker check, you can take a look and see if these people have had any incidences of misconduct. And that might be a red flag to you that maybe you want to move on and talk with somebody else, right? Because if they did it once, I mean, maybe they got their hands slapped, but I mean, maybe they could do it again. And do you really want to be on the receiving end? Probably not. Now, with that being said, too, I usually recommend that people go to large financial firms, you know, the Charles Schwab, the Fidelity, the e-trade, you know, Vanguard, etc., etc. Because by and large, even in the instance where let's say you are with one of these firms and the advisor does something bad and they you suffer the repercussions of it, it's because they're such a large company, they're gonna make it right for you and pretty quickly. If you're with this, you know, no-name firm per se, you know, it doesn't mean that you won't get your money back, but if it's an individual like this guy, you know, who bought the Porsche stuff and went on the run, it's I don't know what it's gonna take to get your money back from them, right? It's gonna be a long slog and probably difficult. So you I always say you can go with obviously anybody you want, but do your due diligence, do your legwork, and really think about who you're giving your money to in terms of who's overseeing your money and what kind of leverage do they have, or what kind of power did you give them to oversee your account? Can they make trades all on their own without you? Or do you have to approve all the trades? And even if they place the trades for you, do you really know what's happening just because they say this is gonna be good for your portfolio, right? And you blindly just trust them. So even in these the best of firms, right? But what I'm trying to say is in a large firm, there's usually a second set of eyes, and maybe a third set of eyes. So that, you know, this advisor who made this recommendation and is going to place this trade, these trades go under the microscope, they go under scrutiny for of compliance. And there's the compliance team that looks at it and asks questions and is it well documented why they're doing what they're doing? And they are again making sure that everything is done right. And sometimes all those pieces are not in place with smaller firms. That's all I'm saying. Because you can go to these wealth management firms, financial planning firms, on and on and on firms, but are all the right pieces there? And you may or may not know because again, you don't know, right? Unless you work on the inside, like you know, I was for years and years and years. I've seen it. I've seen good decisions, bad decisions, and all kinds of crazy decisions, right? And that's another story for another day. I don't want to go into all that, but all I'm saying is you really need to be careful. With that being said, let me shift over to the next lane and let me talk a little bit about your credit score and your credit report and what that really entails and how it can go wrong for you. So as you're monitoring things from your financial advisor, with let's say checking your statements, checking your trade confirmations, etc., um, hopefully you're doing that on a regular and consistent basis. And you're also meeting with your advisor on a regular basis, right? So you can ask questions and they can explain what they're doing, why they're doing. But in credit score situation, you're generally not going to know what's happening unless you check your credit score, right? Because then your score is really going to tell you and be a red flag too if something is happening that you need to pay attention to. So if your credit score drops suddenly by, you know, not just like one or two points, but many points, right? That's something you need to look into. You need to pull your credit report and you need to figure out what's going on. And if you have to, then you can freeze your credit report and then nothing can happen because no one's going to be able to gain access to your credit, meaning nothing it's going to penetrate your credit score because it'll bounce right back. Because if your uh identity has been stolen or compromised or is you know found on the dark web, etc. etc., there's all sorts of horror stories. Then what people do is they get your social security number or they get all your pertinent information and they open accounts in your name and they open credit cards in your name, and then they miss payments, and all they're trying to do is misuse your identification and your good credit, and then they blow it because they're just scammers and schemers, and all they're trying to do is, you know, take as much as they can get from you. So when you look at your credit score on a regular basis, that is your ability to say, let's say my credit score has always been 760, and all of a sudden it's you know in the 600s, then that would be something to pay very close attention to, right? And I know a lot of people don't, but it's saying that you should. One thing that you can do is you could go onto Social Security, right? Sounds like why would I go to Social Security? But you would go into Social Security and you would create an account with Social Security, and they capture all your pertinent information that you put in there yourself. So then it's locked down because you put it in there versus some scammer puts it in there, they create an address over in the Virgin Islands or wherever it is, and they are the ones that when they submit an application for a credit card or home equity or whatever, then that information is going to go through for them. But when you come to realize all this, it may be too late. All I'm saying is that can be a good way to lock down your information through Social Security. So again, these things will bounce back on them and they won't be able to take advantage of you. So you can always, you know, call Experian or TransUnion or Equifax, you know, those are the three big credit reporting agencies, and you can lock down your credit score report, you know, at any time. You can if you want to. Again, and then they have to really get your authorization, and you you then let's say you apply for, I don't know, some personal loan or whatever, then you know you have to unfreeze it, and then they allow that score to be pulled, and then if an account is opened, then you know that you opened it and for what reason, and you're it's no surprise, right? But you want to take a look at things that are within your control, and that means like I mentioned your statements and looking at your confirmations and your quarterly reports or whatever it is that or however frequently you get your information, or you just go online, you know, whatever. And similarly, with your personal information that's out there tied to your social security number, you really want to keep a close eye on that. So fraud is rampant, and it's very unfortunate. I believe I saw a statistic that said 20% of financial advisors have some element of misconduct against them. And that's pretty shocking, right? And that means that they've done something that they got their hand slapped at best, and at worst, again, then they wound up in jail, and that's bad for you. Especially again if you've lost money and you're now trying to get it back. Very long road, as I said. Not to belabor the point. Hopefully you got the point that I'm making, and that these are a couple of tools that you can use to your benefit that are going to be helpful to you. The only other point I'm gonna make is paying attention to what people tell you. And what I mean by that is we all know that you can talk to your neighbor, your bet whomever, a good friend of a good friend who's gonna give you the hottest stock tip. Uh, they're telling you that this guy double-tripled their portfolio for them, and everybody always paints this big rosy picture, and you start to think, hmm, maybe I have missed a boat. Maybe I should be investing in XYZ stock or you know what have you, because everybody else seems like they double-tripled their money. And I want to double-triple my money too. But lots of people, I mean, the fish is a lot bigger than the one that they actually um pulled out of the lake, right? So you want to be very careful and cautious before you do anything like that. Because in my mind, you really have to know what you're doing and is it comfortable for you to do it. And if it's not, again, trust your gut and it says, this is not for me. If you want to go down the route of being more conservative than everybody else, that's totally fine, right? You might not get the double triple returns, but at least you know your money's there when you want it to be there. And investing is not for everybody. I mean, you don't have to invest because everybody else is investing. You invest because you want to invest. And you don't have to invest all your money. You can invest just a small portion or whatever amount that you feel comfortable with. And you can go low risk, medium risk, high risk. You can have a mix of all that, which is generally a good idea. But you can be just as conservative as you want to be. And typically, as you grow older, then you become more conservative because then you're about to start withdrawing money from your portfolio. So you want it to be much, much more conservative because you want it there when you need it there. Generally, the rule of thumb is within five to ten years of your retirement, then your portfolio is going to be shifting gears and going down in terms of risk, becoming more conservative again for those particular reasons. Generally, you do need some money that is still tied to the stock market itself. Again, it can be low risk, medium, high risk. That all depends on what level of risk and how it's defined for you and maybe your financial advisor. But let's say you do have some money in the S P 500, and what that really helps to do in terms of your portfolio is make sure that it helps to keep pace with inflation. If your portfolio is in a very, very conservative mix, let's say it's in certificates of deposit, even in times like today, CD rates are still relatively high. Are they going to get you a 10% return on your portfolio overall? Probably not. But again, you know your money's there. We've all heard stories about people, you know, back in the 1930s, and you know, great-grandmother always kept all of her money in the mattress, and she never, you know, trusted anybody with her money, and she just saved it, and she had a bunch of money then when she passed away, right? My only caution there is if your money's all on your mattress and your mattress catches on fire, then what do you have? Burnt paper or whatever it's made out of. But all I'm saying is we don't really want to go down that route route, but we understand the principle behind it. And that's just saying be as conservative as you want to be when you need to be conservative and be aggressive, like in your early years, because you can take the risk, and if the market goes south and you have time to recover. As you get older, you don't have the luxury of time any longer. It's starting to work against you, and then that's okay because again, if you're starting to withdraw on your portfolio, that's a whole reason that you started saving and investing to begin with, because now you need your money. Same thing, like I said, with the credit score, is you've worked hard at making it getting it to the level that it's at, so you have good credit, so you can get the best interest rates when you do take out a loan, personal loan, credit card, home equity, auto loan, whatever it is. Then again, because your credit score is high, then you get the better rates than somebody whose credit is not so great. And you don't want to be in that position of having not so great credit because that's harmful to you, costs you money, and it takes a long time to rebuild your credit back up, even if it's no fault of your own, right? Like somebody has misused your identity and they did all sorts of nefarious things, and now you're paying the price. And it could take seven to ten years to get this cleared up for your for you, and that's just a very, very long time. Again, you might not even have that. And especially as you age and you're older, then we all know that there's elder abuse, elder fraud, and it's so unfortunate because I mean, again, I can speak from firsthand experience that when your parents age, even your grandparents, whomever you take care of or you're close to, and you see them being taken advantage of, it's just so infuriating infuriating because you know that they're slipping mentally and they're trustwort they're trusting people, and they don't realize that they're going to be taken advantage of. And I could go again into many stories of how this has happened, and maybe I'll do that as a companion post if you go on to pinkmoneypodcast.com, then you can take a look at some of the things that posted out there in the blog and in the companion posts, and also I'll just mention it hasn't anything to do with this per se, but you can take a look at Jerry's playlist too. So there's my little plug for my website. Anyhow, I think that's pretty much it. And if you have any questions, you can uh drop me a line and you can ask me a question and I'll respond to you. Or if you need help with something, let me know and I'll do my best to give you a hand. And other than that, you have a great day.