Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 27, 1995 TAG: 9503270017
SECTION: BUSINESS PAGE: A10 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
This is not about scams. The SCC warning, to the contrary, concerns practices in the legitimate investment industry that can pose serious problems for people who rely on investment income to make ends meet.
``Unfortunately,'' the SCC said, ``it can sometimes be difficult for older investors to know when the risk is too great, or if they are being misled into investing in a product that is unsuitable to their needs.''
Here are some tips from the state agency to help you take charge of your money:
nMap out your financial goals before you meet with a financial planner, broker, investment adviser or any other investment professional.
You need a firm grasp of your short-and long-term goals and needs. How much income will you need, apart from a pension or Social Security, to meet fixed expenses? Do you have children or grandchildren to educate? Are your elderly parents in need of care? How is your own health? What is your tolerance for financial risk?
This means taking time to understand the investment products you may be considering. If you receive a lump-sum payment or an early retirement payout, you may feel pressure to invest it quickly to avoid adverse tax consequences.
If you need time to explore your options fully, put the funds in a money market account and invest when you feel ready. Avoid high-pressure sales tactics and a quick fix.
Know your investment professional.
The first step is to check with the SCC's Division of Securities and Retail Franchising. To find out if the state has any adverse information about him or her, call the SCC toll-free at (800) 552-7945.
Interview two or three investment professionals before settling on one who seems to understand your needs.
Don't assume that a broker who sells investments on the premises of a bank is employed by the bank or is selling products protected by government insurance.
Recognize that a broker who calls himself or herself a ``financial consultant'' or ``investment counselor'' does not necessarily have training or expertise beyond selling stocks and bonds. People who sell insurance and other products that could be defined as investments also may use similar titles.
Ask an investment adviser to give you both parts of Form ADV. They are required to show you Part Two, which sets forth method of compensation, education, areas of expertise, investment strategies, business methods and the like. But ask for Part One as well. It provides you with any disciplinary history, which could give you important warnings.
Understand your investment.
Focus on the whole range of the investment's characteristics, the SCC said, not just the promise of a high return. You should understand the cost, degree and nature of the risks, investment goals (such as income with a high degree of safety), performance history and any special fees.
Never assume that your investment is federally insured, low-risk or guaranteed to deliver a certain return.
Don't rely on oral statements for assurance; get it in writing and be sure you understand the information. Check it against your own goals and risk tolerance.
The best source of information on an offering is the prospectus, but don't be put off by its length. Read the sections on goals and investment strategies, fees and other costs, how the costs are determined, performance and management history, risks compared to comparable funds, any use of derivatives, who makes investment decisions and the place to call for more information.
Your local library should have research data such as Morningstar's analyses of investment products, including mutual funds.
nUnderstand how your financial professional makes money by selling an investment.
If you want truly objective advice, the SCC said, you probably have to pay for it. A fee-only financial planner will charge a certain amount up front for giving advice, but does not earn income, such as sales commissions, based on his or her recommendations.
Most brokers and financial planners are paid through commissions, which means they get a percentage of the money their customers allocate toward the investment. If you give them $5,000 to invest on your behalf and the commission is 4 percent, taking $200, it leaves you with a $4,800 investment. That means you pay out $200, and also lose any income it would generate over time if it were invested.
A fee-only consultant, in contrast, is likely to charge $90 to $125 an hour.
In most cases, the SCC said, the higher the risk, the higher the commission. So the planner or broker may be tempted to recommend an investment with a higher risk than you want.
Just because a broker calls himself a financial analyst or investment consultant does not mean he provides objective financial advice. Don't confuse a sales pitch with impartial advice. Be wary of brokers who seem eager to put you into an in-house mutual fund or exotic, unfamiliar investments. Ask whether the adviser will receive an extra commission or incentive, such as a prize or trip, for selling the product.
Exercise extreme caution when buying uninsured investments on the premises of a bank.
Although the bank may provide more convenience and seem less intimidating than a brokerage firm, it cannot provide you with any more assurance against possible loss of principal in uninsured investments.
Some banks offer only a limited range of investments and may push their own products.
Make sure you fully understand your account statements. They should reflect only the activity you have authorized. If you note a discrepancy, raise the problem immediately with your broker and, if necessary, the branch manager.
Review your statement for the performance of your investment and an accounting of fees and commissions. Contact your professional if you have any questions, and be wary if he or she cannot provide the requested information. Don't be embarrassed about questioning unfamiliar terms and abbreviations on the account statement.
Don't entrust your life savings to anyone who is unwilling to take the time to answer your questions.
Never be afraid to ask questions at any stage of the investment process.
You are in control of your money, even if you hire an expert to help you manage it. Don't sign over discretion for your account to your broker.
You have every right to ask questions about recommendations, including the alternatives, the risks and the commissions. If someone says a return is guaranteed or earnings are completely safe, walk out the door.
by CNB