Consumers can learn a valuable lesson from Wednesday's indictment of a Las Vegas executive and two associates for running an alleged $1.5 billion Ponzi scheme that bilked thousands of victims: It's vital to vet your advisers.
According to the indictment, Edwin Fujinaga and two Tokyo associates promised investors a series of interest payments that would accrue over the life of the investment and would be paid out along with the face value of the investment at the conclusion. Instead, investigators say the defendants used new investors' money to pay earlier investors and to cover personal travel and other expenses.
The indictment comes the same week that a jury is deciding the fate of two advisers accused of victimizing NHL players and other investors. In that case, government agencies charged former financial adviser Phillip A. Kenner and former professional race car driver Tommy C. Constantine with wire fraud and money laundering. The two allegedly defrauded clients — among them former NHL players including Joe Juneau and Michael Peca — of $15 million, spending most of the funds on personal expenses and other purposes unrelated to the pitched real estate and business investments.
Attorneys for Kenner and Constantine were in court Wednesday and did not immediately respond to requests for comment.
Industry experts say both cases have real world lessons for the general public.
Regardless of income, investors often don't vet the financial professionals they hire, instead relying on a word-of-mouth recommendation from a friend, colleague or agent, said certified financial planner Jordan Waxman, a managing partner at HighTower Advisors who works with high-net-worth clients, including athletes and entertainers. That is a big mistake, he added.
Checking up on an adviser's background is a key step before hiring them, agreed Gerri Walsh, president of the Financial Industry Regulatory Authority's Investor Education Foundation.
Perform a 'mid-year financial check-up'
Check again on a regular basis, at least once a year, for advisers, brokers and other financial experts you already do business with.
"Make it a habit, make it a New Year's resolution, make it your mid-year financial check-up," Walsh said. "Just do it."
As a starting point, when hiring a financial or investment adviser, run the names of the individual and firm through free research tools including FINRA's BrokerCheck, the Securities and Exchange Commission's investment adviser search and financial information firm BrightScope's adviser search.
"That's the first question: Are they actually registered?" said Mike Alfred, chief executive officer of BrightScope. Other potential issues that even a cursory search can turn up include job terminations, bankruptcies, suspension of credentials, client complaints and litigation.
Follow up with a broad web search, Waxman said. That can flesh out more of an adviser's background and credentials and offer details — both positive and concerning — from social media profiles, media mentions and consumer reviews. "If you read this particular case (involving the NHL players) there's a report that one of the defendants (Constantine) was a driver for Playboy, had changed his name, and had pled guilty to drug charges," he said. "Everything is public."
Additionally, scrutinize the string of credentials behind a pro's name, said Alfred.
Some — such as certified financial planners and chartered financial analysts — require significant coursework, exams and experience with designees committing to ongoing education and held to practice standards. Others are more of a marketing tool, he said.
"You can get some in two hours." To be thorough, check credentialing groups' databases to make sure that person has the credentials in question, Walsh said, and to research the requirements.
Ask plenty of questions, including what kind of products and services the firm offers, how advisers are compensated, and whether they are held to a fiduciary standard, said Waxman.
"The same sorts of red flags come up all the time in fraud cases," he said. For example, that there's no independent custodian for the assets, the adviser reports results himself rather than allowing clients regular access, and transactions are opaque.
Recommendations that deviate from the balanced portfolio norm are also worth a gut check. "The more the adviser is pushing you to have a large percentage of investments in one thing, the more you should be suspicious of that thing," Alfred said.
Of particular concern: riskier private investments (like start-up businesses and land deals) that can't be tracked on an exchange or easily sold.
In the case of Fujinaga, investigators say the Las Vegas adviser and his associates promised investors they would buy accounts receivable from medical companies at a discount and recoup the full value later from insurers. Instead, the defendants allegedly used new investor money to repay earlier investors and to pay themselves sales commissions, subsidize gambling habits and cover luxuries like private jet travel.
"You should absolutely understand what the products are that you are investing in," Walsh said. "If you don't understand them, think twice about allowing a professional to persuade you (to invest in them)."