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Protect Yourself Against Financial Con Artists: Part II

William Francavilla, Con Artists Part II

With William Francavilla, Certified Financial Planner and Author of The Madoffs Among Us: Combat the Scammers, Con Artists, and Thieves Who are Plotting to Steal Your Money

Steve continues his conversation with Bill Francavilla, a Certified Financial Planner with over 30 years of experience who helps consumers protect themselves against fraud through his new book, The Madoffs Among Us: Combat the Scammers, Con Artists, and Thieves Who are Plotting to Steal Your Money. (Click here for Part I.)

Victims Include Billy Joel And Robert De Niro

While most of us are smart and watch out for ourselves, we are all too busy with our daily personal and professional lives and so sometimes fall victim to slick hucksters when we do not take time to fully comprehend the nuances of financial planning and the financial markets.  In The Madoffs Among Us, Bill Francavilla writes about famous people getting ripped off, including Billy Joel and Robert De Niro.

Billy Joel lost several million dollars to his brother-in-law who, instead of investing Billy’s money wisely, squandered it to satisfy his own greed and opulent lifestyle.  When red flags started popping up, Billy realized his money was all gone. He had been too busy with his music and foolishly trusted someone without accountability or follow up.  Joel was guilty of one thing—not paying enough attention to his own finances, and he paid dearly for it.

Robert De Niro’s father was an avid painter. When Robert decided to sell those paintings, he hired an art broker to represent him.  The dealer sold the paintings but kept most of the money for himself, causing Robert to lose close to a million dollars.

Independent Checks And Balances

To prevent such losses, Steve recommends having a system of checks and balances with a financial advisor, an accountant, and an attorney who have no overlapping interests, are not in the same office or working together in any way. Each, therefore, can independently keep tabs on the others and report back to you directly.

In Billy Joel’s case, his brother-in-law paid himself fees and commissions for managing and investing Billy’s money.  Steve believes that the person advising you should not also earn commissions since that creates an inherent conflict of interest. A better option is to stick with a paid-only advisor who is required by law to serve your best interests for a small fee.

FINRA And Financial Policing

The financial industry doesn’t like its reputation tarnished.  Bill Francavilla, author of The Madoffs Among Us, says the financial regulatory authority (FINRA) and the Securities and Exchange Commission do a fairly good job of policing the industry and bringing wrongdoers to justice.  Even so, with millions of transactions, the 19% of advisors with bad intent will manage to scam their clients, but most eventually get caught.

In addition, Senator Elizabeth Warren from Massachusetts has introduced far-ranging legislation to make firms liable for employee misconduct, but Bill believes it might not succeed.

Avoid Novice Financial Advisors

In The Madoffs Among Us, Bill Francavilla cautions investors to avoid hiring novices who have little or no experience helping people solve their financial problems unless they are backed by a mentor or are working on a team to supplement their decision making.

Avoid Highly Opinionated Advisors

Secondly, Bill recommends against hiring someone who is highly opinionated about the market’s direction going forward—either too bullish or too bearish.  That’s because financial planning is focused on meeting an individual’s investment and retirement needs, not making them super rich (or super poor) by betting on market direction.

Avoid The Salesman

Thirdly, avoid the salesman type who invites you to a nice luncheon or dinner and wants to sell you that one financial product that will solve all of your financial needs, which is invariably some sort of annuity.  Such advisors aren’t interested in meeting your financial goals but are single-mindedly focused on selling you something so they can earn commissions.

In such instances, sleep on your decision for a day or two and do some research on the product you’re being sold and the person selling it to you before you make your investment decision.

With the Internet, financial scams are at an all-time high, so books such as Bill Francavilla’s The Madoffs Among Us: Combat the Scammers, Con Artists, and Thieves Who are Plotting to Steal Your Money can go a long way in keeping your money safe.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: I’m back with Bill Francavilla, the book is Madoffs Among Us: Combat the Scammers, Con Artists, and Thieves Who Are Plotting to Steal Your Money. And if you want to hear the first part again, don’t forget to go to our website at stevepomeranz.com, where you will be able to hear the first part of this.

Bill, welcome back. I was talking about the idea that all of us are really busy doing other things and investments or practicing law, these are complicated things to a large degree. You speak in your book about famous people like Billy Joel getting ripped off and Robert De Niro.

Quickly tell us about those two.

William Francavilla: Actually, what you just said are both so true. We are busy, we all have our professions and it does take a pretty good effort to fully comprehend and understand the nuances of financial planning and the financial markets, and so on and so forth.

Billy Joel, in his situation, he lost several million dollars to his brother-in-law, who simply said, I’m your financial guy. Billy Joel said, great, and paid him a ton of money over a number of years in commissions and fees and so on and so forth. But he wasn’t investing it on Billy Joel’s behalf, he was ingratiating himself and spending it and had an opulent lifestyle.

And when it all came tumbling down, guess what? Billy Joel was out that money. There was no recourse, it was all gone. But Billy Joel was doing what he does best. He was entertaining, and he was trusting somebody and there was no accountability, no follow-up. You know what?

If Joel was guilty of any one thing, he should have been paying attention because by not paying attention, he paid dearly. And DeNiro, man, God love him. His dad was an artist and he did several paintings and Robert DeNiro is very proud of his father’s work. His dad passed and he would showcase them and when it was time to redeem these, he hired an art broker to come in and represent him.

He did represent DeNiro but he mostly represented himself, and he simply took the money, and DeNiro lost about a million dollars.

Steve Pomeranz: It just, I think with the Billy Joel example, first of all, it was a relative, an uncle or something, and you trust him and he’s part of the family and he’s kissing your babies and he’s fussing over it and all that, and so you don’t really think of that.

But I think one of the ways—because I don’t think Billy Joel’s going to become an expert in investments—but it would be nice to have checks and balances. Also have an accountant, have an attorney, have the three of them separate, not in the same office or whatever working together.

But looking over each other’s work and making sure that checks are going into the right accounts and made out to the right entities and things like that. Also, you mentioned one other thing, and I don’t know this applies strictly to Billy Joel, but you said the uncle was earning commissions and things like that.

It seems to me that you really don’t want to have an advisor that is also advising you and then also earning commissions on the things that you’re being sold.

William Francavilla: That’s correct.

Steve Pomeranz: There’s a lot of brokers who do that and they do fine, but really, if you think about it, it’s a conflict of interest and you really don’t know whose interest is being best served when it comes to a commissionable item.

So I think arm’s length is the best course of action there. So, Bill, doesn’t the financial services industry police their advisors?

William Francavilla: They do and I gotta tell you, they’ve done a pretty darn good job. FINRA, a financial regulatory authority, as well as the Securities and Exchange Commission, as well as the respective state departments that oversee a lot of these situations.  They have been very, very compelling with the firms. Making certain that they are looking out after their respective clients’ best interests, monitoring the activities, the trades of their financial advisors. But you just can’t cover all your bases. There will be some miscreant, there will be some bad person in a corner office somewhere who is getting away with the figures that you had stated earlier in our call. The 19% with intent will perhaps lie or defraud the investor.

Senator Elizabeth Warren, from Massachusetts, she has introduced some legislation that could be far ranging. But I’ve got to tell you more than anything else, it’s a boon for the attorneys because it’s going to kick up a tremendous amount of litigation.

Steve Pomeranz: You’re talking about this law that Warren is talking about?

William Francavilla: Yes, she is going to make the respective firms liable in the event someone steals, say they steal $100,000 from someone, and there’s no financial recourse for the plaintiff, the firm has to come back and make that person whole.

I don’t think it’s going to get any legs, I really don’t. It’s like trying to legislate morality.

Steve Pomeranz: You’re going to have the rotten apples I don’t want to get into the politics of it. It’s not that important to this discussion. So let’s get to the areas that our listeners can really benefit from.

First of all, let’s talk about what the book is, it’s The Madoffs Among Us: Combat the Scammers, Con Artists, and Thieves Who Are Plotting to Steal Your Money. Let’s learn how to do that. So you list in your book three types of financial advisors to avoid. Who are they?

William Francavilla: Number one, it’s the novice. It’s the person who just certified for his or her Series 7, who has little or no experience in the industry and really helping people solve their problems. Steve, I was that person.

Steve Pomeranz: Yeah, we all were.

William Francavilla: I was a novice, everyone gets started.

Steve Pomeranz: Yeah.

William Francavilla: And the exception to that is if that younger person in the business has a mentor or perhaps works on a team, can bounce solid ideas from a senior person to really, really supplement the decision-making that is so important to the client. But my goodness, I remember my first year in the business.

Steve Pomeranz: Terrible, terrible.

William Francavilla: I was dangerous.

Steve Pomeranz: Stupid, dangerous.

William Francavilla: I tried to do the right thing, I just didn’t have the information, I’m sorry. The learning curve is pretty steep.

Steve Pomeranz: That reminds me of someone’s nephew who just got into the business, so you may throw them some business, throw them some money as just a gesture.

But first of all, you really don’t want to do business necessarily, with someone in the family unless they’re very well-trained and also have a lot of experience. And you can go through all that, but I see this from time to time. I’ve been in practice for over 35 years and a nephew will get into the business so they throw him some money.

So the novice is a big deal and novices are by definition dangerous, I would agree. I was dangerous, you’ve admitted you were dangerous. We both know what we’re talking about.

William Francavilla: You bet.

Steve Pomeranz: What’s the second type to avoid?

William Francavilla: The second person is the person who is highly opinionated.

Someone who believes that the markets are going to grow to the clouds and you’ve got to be 100% invested and don’t worry about it. You could make a ton of money by being 80, 90, 100% invested in equities. Conversely, is the person who says, my goodness, the sky is falling, let’s move to cash, let’s move to precious metals, let’s move to guaranteed annuities because there’s no future in the stock market.

They’re entitled to their opinions, and one of them, perhaps, is going to be right. But the business of investing, the business of financial planning, is to meet the individual’s needs. We don’t have to listen to the extremes. We just want to focus on, perhaps, our number one goal is a comfortable retirement and we’re in our early 50s, mid-50s.

There’s a plan for that, forget about the noise, forget about the highly opinionated because you’re going to be disappointed. And the third and last, I’m sorry- [CROSSTALK].

Steve Pomeranz: I was going to say, especially if we know that we’re driven by greed and fear. If someone is saying that the market’s going to crash, go to gold, go to this.  I’m afraid of that, and all that, that’s bubbling up, that gets to bubble up the fear inside you, and they know that.

So they’re trying to get you to act. What’s the third one?

William Francavilla: The third one is the salesperson, the person who invites you to a nice luncheon or a nice dinner and has one product that is going to solve all of your financial needs. It might be variable annuity.

Steve Pomeranz: It’s always an annuity of some kind.

William Francavilla: It is typically the annuities. [LAUGH] And I’m okay with annuities, they have a place, absolutely have a place.

William Francavilla: But, man, and you can see this person coming a mile away, they’re slick and they don’t listen to what your problem is.

They’re not trying to solve your problem. They’re trying to sell you something. You know what? Again, we want to take a break, 24, 48 hours, do some homework. Get up, do a Google search of what this person is talking about, who this person is. Make sure you’re working with the right person, with the right setup of talents and understanding of markets.

Steve Pomeranz: We’re out of time, but I will add one further thing to that. When you’re working with someone who only has one kind of product for sale because—there is an old saying that if you are a hammer, everything looks like a nail—so it’s a solution looking for a problem, instead of a problem looking for a solution.

My guest is Bill Francavilla.  The book is, The Madoffs Among Us: Combat the Scammers, the Con Artists, and Thieves Who are Plotting to Steal Your Money.  I definitely recommend this book. It says it teaches us the kinds of certifications you should look for in an advisor, the things that you need to teach yourself before you start to get into the world of investments.

You don’t have to be an expert but you do have to have some basic knowledge and make sure that if you don’t, you’re with an advisor that is happy to educate you as well. Bill, thank you so much for joining us. We’ll have you back, promise.

William Francavilla: Thank you for the invitation, I’ll look forward to it, Steve.

Steve Pomeranz: Good luck with the book. Take care.

William Francavilla: Thank you so much, bye-bye.

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