Bermuda Financial Fundamentals Series — Investing: Mutual Funds and Portfolios.

(Continuing the Bermuda Financial Fundamental Series on mutual funds and portfolios — Part 3)

The three most frequently asked questions conveyed to me over the years by beginning and even sophisticated, individuals wanting to invest in capital markets are:

— How do I find a good financial representative (FR) and Investment Provider Firm (IPF)?

— What should I be looking for relative to investments for me (and my family)? We are so concerned about ending up with some scam because we don’t understand a lot of investment concepts.

— How can I figure out what the real cost is?

All three questions seem so simple and straightforward, but are truly loaded with complicated explanations and what if scenarios. I will try to simplify them down to the bare minimum information. Otherwise, as readers also say to me, too much information, too long an article and they feel tired before they even start reading the column.

Basically, there are two types of financial representatives: The qualified licensed / bona-fide credentialed FRs that are mandated under rigorously enforced fiduciary standards to always put your interests (as a client first) ahead of their own, and those FRs that operate under a lower-tier standard of just client suitability, generally known as stockbrokers.

The Alphabet Soup of Names.

* There are, at this point, possibly more than 100 titles and various designations for financial representatives that appear to be very genuine. See the link to the Alphabet Soup – if you’d like to make your head spin. Descriptions can be very misleading; some titles may look very similar to the Big Four (CFA-Charter Financial Analyst, Certified Public Accountant, Certified Financial Planner, Chartered Financial Consultant), but are not. For instance, taking a six-week security course or studying for some other investment or planning exam, or listing designations as financial adviser or investment consultants are actually not licences / designations at all, they are generic names, nothing more.

Some other designations according to the US Consumer Financial Protection Bureau’s white paper Senior Designations for Financial Advisers: Reducing Consumer Confusion and Risks, * particularly almost anything labelled “Senior Investment Adviser, Retirement Consultant” and more than 50 other senior designations are particularly confusing. They may be real. They may be completely fraudulent.

A bare bones minimum in the US, a Series 6 securities licence obtained after studying to sit for a three-hour exam, regulates the individual working in an investment environment to sell US mutual funds only to prospective investors. Canada by provinces and the UK have similar structures for broker licences.

The US Series 6 or 7 does not meet the financial planning standards of a Certified Financial Planner or Chartered Financial Analysts regarding portfolio management knowledge while adhering to the rigid professional ethical qualifications of all the ‘big four’ listed above. Qualified investment individuals spend, after earning a university degree, thousands of hours of study, sitting for one to three all-day punishing exams testing knowledge across the financial, legal, tax, and regulatory spectrum. Pass rates are low.

The ‘big four’ financial professionals earn their designations; even then, they cannot display the licence / designation until they finalise a two-three year (attested) actual professional practice internship/pupillage experience just as in practice of law, medicine, and accounting.

Individuals putting themselves through these arduous programmes (some have stated the most miserable demanding programmes ever) must agree to be fiduciaries. Then, they must be guided by global membership principles, including ethics, or face board sanctions/ public censure / expulsion imposed for misbehaviour to outright criminal behaviour enforced along with civil / criminal prosecution and punishment.

A financial representative (also called a broker) that does not possess the qualifications of the ‘big four’ may state that experience, firm reputation and so on are more than enough. That may be quite satisfactory for many investors.

The higher global standards for the licensed credentialed professionals are enforced in order to protect the client who has placed trust in the individual and the investment process. These standards provide you, the client, with additional comfort in the investment process.

If you haven’t been bored completely, you may be impatient. What do these explanations about financial representatives have to do with scams and scammers? Answer. Plenty! According to the US FINRA – Financial Industry Regulatory Authority, one of the best ways to protect yourself against investment scams is to check out investment professionals: their licence, their background, their firm, their investment products and so on.

Ask for Information disclosure, disclosure, disclosure. The more information that you have, the more you will understand what you are purchasing, who you are buying it from, and the more answers that will either make you feel positive about your new investing goal, or leave you feeling skeptical and suspicious.

Bermuda has been hit again by scammers reported a week or so ago. So, how do you avoid scams?? Licence, credentials, ethics, reputation, gut reaction, learning knowledge, industry comparisons, common sense, and your best research friend — Google. Suitcase salesperson flogging some wonderful scheme recommended by a “friend.”

Financial crimes records that run a mile long all over the internet. Google can be your best friend when it comes down to learning about anything. Warning, the rule while not always true — in finance, the pricier the suit, the higher your cost, and the riskier your investment.

The last scam that I researched for a client — who almost made the investment leap — turned up several pages on the “purported investment adviser” who had a litigation and criminal charges record a mile long. Be Aware. Be a cynic like me. Be knowledgeable and do your own homework.

In the normal investment process, you have a right to ask for all relevant information that will make you feel that you are a valued client and that you can trust your FR. If your FR is forthcoming, objective with you, and provides full disclosure, it can be the beginning of a good financial relationship. If after the interview process, you don’t get that comfy feeling, walk away. You work way too hard for your money.

Next week. What is full disclosure? Learn about the interesting scams and the more than tawdry financial schemes that manipulators use to take your money. And yes, they have happened in Bermuda. Remember Global Prosperity. Answer to the third query. We know what it cost — some stories of losses in this scam were heart-breaking.

(Part 2 – November 1, 2014, Who can you trust with your money, The Royal Gazette)

Sources:

*Alphabet soup of financial certifications: Is Your Financial Adviser Pumping up His Credentials. WSJ, by JASON ZWEIG and MARY PILON, October 16, 2014

http://online.wsj.com/articles/SB10001424052748703927504575540582361440848

**US Consumer Financial Protection Bureau’s white paper “Senior Designations for Financial Advisers: Reducing Consumer Confusion and Risks.” Financial Advisers Abusing Senior Specialist Labels by Phillip Moeller, April 19, 2013 US News & World Report

http://money.usnews.com/money/blogs/the-best-life/2013/04/19/financial-advisers-abusing-senior-specialist-labels

Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or any other investments. Readers needing specific assistance should seek individual advice from qualified finance professionals.

Martha Harris Myron CPA CFP JSM Masters of Law: International Tax and Financial Services,

Appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland

President: The Pondstraddler* Life™ Consultancy: international financial planning, publications, presentations for the challenging lifestyles of multinational individuals and their families residing, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle. Specific focus for residents of Bermuda, the premier international finance centre. Contact: martha@pondstraddler.com