Financial Opinion and Insights

How Bad Advisors Spot Easy ‘Marks’

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

… and how good advisors spot unsophisticated clients.

A little over a week ago I saw a short special program – it might have been on one of the PBS stations – conducted by the industry’s regulator authority, FINRA and a representative from AARP.  It was about the ‘red flags’ people should look for in avoiding investment scams.

Almost all the red flags had to do with things to listen for, etc.; but, they all had one thing in common:  Client greed.  The ‘scammer’ can’t appeal to someone who isn’t greedy.

One of the points the program rightfully made was that most victims aren’t `little old ladies’ or widows, etc.  Quite often, they’re what most people would consider sophisticated investors.  In fact, they consider themselves sophisticated investors.

They weren’t.  Not one of them.

They didn’t reveal the credentials of the stockbroker victim they featured.  Chances are he was little more than a securities salesman.  And, just because someone studied tax preparation/strategy or medicine doesn’t make them a sophisticated investor, either, any more than it would qualify them to work on guidance systems for the Space Shuttle.

Often, people who consider themselves to be sophisticated investors reveal their lack of sophistication quite quickly.   Usually they’ll ask an advisor they meet, whether in a business situation or socially, a common question.  It’s a question that tells the `bad’ advisor how to make a sale – and it tells the high-end advisor that the investor has never had a true financial plan and really knows little, if anything, about the investment process.

Here’s the question you should NEVER ask an advisor:

“What kind of return do you get for your clients?”

The `bad’ advisor is thinking:  This idiot is simply chasing return.  S/he buys based on greed.  All I need is the right charts – along with a few other bells & whistles like short time, limited supply, etc., and I’ll have a buyer!

The high-end advisor is thinking:  This is a small-timer who has no experience working with high-end asset management.  If he did, he’d know I have 45-year-olds and 80-year-olds as clients and they’re not trying to achieve the same objectives.  The question shows s/he’s never experienced the financial planning process and since s/he thinks they know what they’re doing when they don’t, this is going to require a lot of education.   Be wary.  People who continually `chase returns’  – which this person does or else I wouldn’t be hearing this question – are always searching for the silver bullet and never seem to stick with anything.

Result:  The `bad’ advisor will begin engaging the prospective client in a ‘returns’ discussion.  The high-end advisor may engage in polite conversation designed to `qualify’ the prospective client quickly.  The usual outcome is disqualification.   This person will likely end-up with someone selling investments – and will likely buy the best story.

That’s my two-cents.



Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com.