Jennifer White, Director of Client Engagement is located in our New Bern, North Carolina office.
The Shakespearean tragedy of the Madoff Ponzi scheme showed the depths of how low human beings can go to fuel their greed. The whole world watched, as virtually every investor was directly or indirectly affected by the unbelievable scale of deception that was unfolding. Since then there have been many changes made within the investment industry to help prevent this type of event from happening again. However, even with the recent regulations and laws going into effect, none of it matters if investors continue to make the same misguided choices led by greed and the promises of delivering a high alpha.
The Pigs Get Fat, While the Hogs Get Slaughtered
Investors of all kinds can be blinded by greed, not just within the equities arena. In 2007, as a Realtor, I remembered listening to a co-worker who was unsuccessfully trying to stop his client from walking away from a substantial offer on a development property he was flipping less than 48 hours after going under contract. Convinced the doomed economy was a macroeconomic problem and not going to affect the posh ski resort marketplace he held out looking for a higher profit and rejected the offer. Regrettably, as predicted a few weeks later the market crashed, and the investor was stuck upside down owing millions of dollars.
Beware of the “Beta-n-Switch”
Another trap investors fall into is the lack of understanding of the risk or volatility involved when investing outside of public equities. As was the case with, Future Income Payments, the private pension product scheme. This scam put the spotlight on many issues. The fact that Scott Kohn, a convicted felon, was able to sell private-market products to vulnerable retirees is terrible enough, but then to learn other financial advisors were doing his dirty work for him?
The private equity market has been heating up and making its way into the space of novice investors. This push is driven primarily by the fear that the public stock market has peaked and a significant correction is looming. As a pre-retiree or retiree, this can create panic, making them easy targets for financial advisors who can hide behind the confusing landscape of privately traded investments. Unlike publicly traded investments, there are very few laws protecting investors from the Madoffs and Kohns of the market.
What Are Ways to Protect Yourself?
As the saying goes, “If it seems too good to be true, it probably is.” Be sure to stay true to what your personal goals are and stay the course. Another way to protect yourself from unforeseen risk is having a fiduciary advisor in your corner. Someone whom you know is genuinely looking out for you and your family’s wellbeing. The search for such an advisor can also be a confusing task, as the term fiduciary seems to be watered down a lot. To make sure you are working with an actual fiduciary, check to see if they are registered with the National Association of Personal Financial Planners. You can click here to connect to the NAPFA website.