With the economy struggling, promises of financial security look especially attractive right now. But now more than ever, you have to look at such promises with a skeptical eye -- before you make an irreversible mistake that could ruin the rest of your life.
Unfortunately, it isn't too hard to find disreputable professionals who are willing to go to great lengths to take advantage of people's lack of financial expertise. Although the Bernie Madoff Ponzi scheme case is an extreme example, less dramatic situations can cause just as much damage to unsuspecting investors.
One common way that unscrupulous advisors trick people is by using numbers that are simply too good to be true. For instance, the Financial Industry Regulatory Authority (FINRA) recently imposed a fine of over $7 million on Morgan Stanley
You might wonder how someone might get duped into believing that they could count on double-digit returns with no risk. Historically, going after such high returns would generally force you to put almost all your money into stocks -- something that's far riskier than most new retirees would ever want to do.
Desperate times, desperate measures
Yet to understand how someone could get tricked like this, consider the lack of investing background that many people have. If you're a long-time worker at a company that has a traditional pension plan, you may never have had to manage your retirement savings at all. Yet you might be tempted by the opportunity to take a lump-sum withdrawal at retirement -- especially with incentives for workers to take early retirement packages, such as severance payments or other perks to sweeten the deal.
And with big employers like General Motors
The majority of financial professionals do their best for their clients. But given the rash of abuses lately, you won't offend anyone by taking some steps to verify any advice you get from an advisor. Here are some things to keep in mind:
- Watch out for historical returns. Because the stock market as a whole has performed so badly even when you look back 10 years or more, you're likely to see return projections that are either based on longer periods or taken from certain periods. If you see an optimistic return projection on an investment, make sure you find out how it has performed during the bear market -- and in the years preceding it.
- Know your time horizon. To invest in stocks, you should expect to hold onto your shares for a relatively long time -- 5-10 years is a good range -- before you need the money. If you expect to use it before that, you shouldn't invest in stocks, even if they might give you better returns. You can't afford the risk of an ill-timed downturn.
Don't swing for the fences. As a new retiree, the lump-sum payment you just got may be the last money you ever get from your former employer. So if you're considering individual stocks with part of that money, you should stick with relatively conservative companies like Microsoft
(NASDAQ:MSFT)and Johnson & Johnson (NYSE:JNJ). Don't bet your life savings on a stock tip, no matter how attractive it may sound.
Plenty of intelligent people have been taken advantage of by convincing pitches from people who turned out to be crooks. If you're careful, though, you don't have to become the next victim.
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Fool contributor Dan Caplinger learned the cons of working with financial advisors the hard way. He doesn't own shares of the companies mentioned. Microsoft is a Motley Fool Inside Value selection. Johnson & Johnson is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. You'll never regret the Fool's disclosure policy.