4 mistakes you should avoid when looking for a money manager

Posted3/27/2016 7:36 AM

When former National Basketball Association player Scottie Pippen found an adviser who was strongly recommended by his team, he trusted the man with $20 million of his fortune.

But less than a year later he learned from an accountant that the adviser may have committed bank fraud, according to the Chicago Tribune. His former adviser, Robert Lunn, was eventually found guilty of fraud. On Tuesday, Lunn was sentenced to three years in prison for multiple schemes, including forging a $1.4 million loan in Pippen's name.


Pippen's experience offers lessons for anyone searching for an adviser, even if their savings don't add up to millions of dollars, financial experts say. "It's worth spending a little time to research who you're dealing with," says Gregor Matvos, an associate professor of finance for the University of Chicago Booth School of Business who co-authored a report on misconduct by financial advisers.

Here are some of the mistakes to avoid when looking for a money manager.

Failing to vet a friend's recommendation

Some fraudsters purposely target people who share beliefs or a culture, known as affinity fraud, because it creates a false sense of trust, warns the Financial Industry Regulatory Authority, an agency that oversees professionals selling stocks, bonds and other investments. Similarly, some people may make the mistake of hiring someone simply because he or she is working with many people within a company or industry, says Gerri Walsh, senior vice president of investor education at Finra.

Not doing the research

Before signing on with an adviser, investors should check to see whether the person is registered with Finra by searching BrokerCheck, the regulator's online tool for tracking financial professionals. If an adviser's or broker's name doesn't show up, it could be a sign that he or she is not authorized to sell investments, Walsh says.

BrokerCheck will also show whether complaints have been filed and the nature of those complaints, she says. Another option is for consumers: SmartCheck, a tool from the Commodities Futures Trading Commission that guides people on researching their financial adviser's credentials and complaint history. Investors should look up their brokers at least once a year, Walsh says.

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Assuming a big firm is secure

Pippen's former adviser worked for major financial firms such as Morgan Stanley and Lehman Brothers before he started his own company. Investors should know that even advisers who work at well-known firms may get into trouble. A working paper by the Booth School found that 7 percent of advisers had been disciplined for misconduct, and that at some larger firms the rates of misconduct were as high as 20 percent.

Ignoring the paperwork

According to court documents, Pippen was talked into signing up for a loan that he did not want and knew little about. Later, his name was forged on documents to extend the loan. Investors should read any paperwork closely before they sign, Walsh says. They should also ask questions about the form and how it may change access to their money. "If somebody tries to breeze you through and shrugs off your questions, that's another red flag," Walsh says.

Investors who worry that their broker or adviser may be lying should seek legal help and alert regulators, who can help investigate the broker and recover lost money. But don't go straight to the adviser or firm in question. "The sad reality with someone who is stealing your money is that if you ask to close the account, they'll probably have 99 reasons why you shouldn't," Walsh says.

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