8 Ways to Avoid Financial Abuse

Don't get scammed.

One of the biggest threats to your financial security is the bad advice you could receive from a financial adviser or the investments you may make with that person or firm.

The Bernard Madoff case highlighted how important it is to do your homework, since many of the convicted swindler’s clients trusted him and never asked how their investments worked.

When it comes to investment fraud, "90 percent of cases could have been eliminated if investors just asked and checked," says Lori Schock, director of the Office of Investor Education at the Securities and Exchange Commission.

So checking out your financial adviser is critical.

A recent study by the CFP Board found more than half of certified financial planners have personally worked with an older client who has been subjected to unfair, deceptive or abusive practices when it comes to the financial advice they received or the financial products they were sold.

“Older Americans have already given many years of hard work and dedication — raising families, serving in the military, building businesses — all to become one of our most financially secure generations,” says CFP Board CEO Kevin Keller. “This survey reveals the pervasive financial abuse victimizing America’s seniors.”

It is not only older Americans who should be wary about financial adviser scams. The CFP Board, a non-profit organization that oversees certification for financial planners, suggests investors take specific steps to avoid falling prey to financial abuse.

Follow these eight rules.

By , 
CNBC Personal Finance Correspondent

Posted Sept. 10, 2012 

Check out your adviser's employment history, disciplinary records, and registrations.

Investment advisers are licensed to give specific investment advice and owe their clients what is known as "fiduciary duty;" that is, offering clients advice in their "best interest."

Brokers, on the other hand, may merely execute suitable securities transactions for their clients. Understand the difference. Brokers are regulated by FINRA; investment advisers are regulated by the SEC and/or a state securities regulator; insurance agents by the state insurance commission in states where they do business; and certified financial planners by the CFP Board, the organization offering that certification.

Visit www.finra.org/brokercheck,www.adviserinfo.sec.gov,www.nasaa.org,  and to check on your adviser.

Know how advisers are compensated.

Advisers should disclose any conflicts of interest (or perceived or potential conflicts) that could impact their recommendations.

Find out if a potential adviser is paid an hourly rate, a flat fee, or a commission on the value of assets managed for you or on the securities they sell.

Also ask for a which outlines an adviser’s services, fees and strategies — or look it up yourself on the SEC website. 

Ask for pros and cons of each investment idea.

If you're only hearing the reasons why you should make the investment, you're not getting the full story. You may not know how to choose the right investment; that's why you hire an expert.

But you should understand how the investments work. Your adviser should be able to explain the pros and cons of the investment strategy and actual investment products. Ask questions if you don't understand and don't hesitate to get a second opinion.

If statements only come printed on the adviser's letterhead, that's a red flag. You should get regular statements from independent sources, not only your adviser.

Also, never leave blanks on paperwork you fill out. And request final, submitted copies of paperwork for transactions. Copies for your personal records should always have the word "final" or "submitted" stamped on them.

Never make checks payable to an adviser directly.

Always make checks payable to the adviser's business or custodian — not in the adviser's name.

Don't put yourself in a situation that would give an adviser unlimited access to your money.

Don't make major investment decisions immediately after a significant life change, like a divorce or death of a loved one. Ask a trusted family member or friend to help you review materials and make decisions.

You should also consider fees and timing. Before agreeing to any transaction, ask about the charges you will incur and the exact timing involved.

Your overall financial plan should encompass some estate planning, as well. A financial power of attorney may be even more important than a will. Designate a friend or relative you trust to handle your investments in case something happens and you are incapable of doing so yourself.

The financial power of attorney document not only spells out your wishes but also specifically names who steps in should you become incapacitated.