Important Self Defense for Investors

Investment Advice

When making investment choices, Experts suggest adopting the attitude used by police detectives when looking for a motive for crime: Follow the money.

All too often, notes the New York City-based lawyer, individual investors are talked into the investment that will reap the highest return for their investment counselor rather than for the investor.

Allen speaks from experience. He says that during his eight years as a stockbroker and money manager, he often had to report to his supervisor on his plans to boost sales. However, management never inquired about the profits of his clients. Invariably, he was urged to sell the product that offered the highest sales commission for him and his brokerage house. But it gets worse.

“After 30 years investing in the stock market – including five years as a stockbroker and three years as a vice president of investments with two different national brokerage companies – I grew disgusted with the misrepresentations and dishonesty around me, with the outright greed and hucksterism, but most of all, with the surprisingly simple ways today’s industry can and does cheat people,” Allen says.

Allen now makes his living representing investors who feel they have been bilked by an investment adviser. He would be much happier if there were no such clients to represent.

That’s why Allen wrote the book, Investor Beware! How to Protect Your Money from Wall Street’s Dirty; Tricks (John Wiley & Sons). Allen turns the industry inside out so readers can see what really goes on behind an investment adviser’s closed door. The best defense, he says, is investor education.

“A person armed with knowledge is much harder to cheat,” says Allen. That message is reinforced with specific examples throughout the book.

Many investors who’ve been charmed or cheated out of their money are haunted by the sense that they’ve been idiots, and if they’d been a little more savvy it wouldn’t have happened to them. But, says Allen, a former entertainment lawyer, it can happen to anyone. Those who read Carrie Fisher’s book, Surrender the Pink, will remember the actress’ shock at discovering she is suddenly broke. The discovery was made all the worse by her mother’s reminder that she’d been suspicious of her investment adviser all along. “I warned you!” reminded mother.

Many celebrities have found themselves in the same leaky boat – singer/songwriter Billy Joel and actor James Caan among them. The legendary hoopster Kareem Abdul-Jabbar made history as the oldest man in the NBA. He had to play additional seasons to make up for money he’d lost due to bad investment advice.

That’s not to say there are no honest stockbrokers or other types of investment advisers. It’s just to warn all of us that in some states it’s easier to become an investment adviser than it is to become a hairdresser. People who don’t understand how the industry works or refuse to learn about investments in general always are vulnerable.

A peek at the book’s chapter titles give readers an idea of Allen’s blunt approach. In “How to spot others making a living off of you,” he describes the army of “experts,” including analysts, stockbrokers and newsletter publishers, who don’t live up to their promise. He also strips the mystique away from the most often- abused investment products, including limited partnerships, penny stocks, initial public offerings and even mutual funds.

Why doesn’t the government do more to protect investors? In an era of smaller government, it may be impossible. “In California alone, the U.S. Attorney’s office gets more than 6,000 complaints a year about financial fraud, a 50 percent increase from five years ago. Yet the staff in its enforcement department hasn’t kept up with the enormous growth in claims,” Allen says.

Once an investor has been bilked, Allen adds, the recourse often is less than satisfactory. Allen prefers the arbitration process for recovering funds, but changes are pending with the Securities and Exchange Commission to give investors fewer rights in arbitration. Class action suits, though much detested by corporations, sometimes benefit corporations more than they do investors.

“Unfortunately, the sorry state of affairs in our litigation-prone society is that class action lawsuits are a marvelous vehicle for a defendant (corporation) to escape from the majority of damages that would be assessed against it if individual lawsuits were to be filed against the corporation,” Allen says.

Allen offers the simple – and totally sensible – advice that all investors should take responsibility for their own investments and for defending themselves against fraud. Again, says Allen, knowledge is the best, and perhaps only, defense.

To protect ourselves from fraud, Allen explains, an investor must know the difference between a reasonable rate of return and a rate so high that it must carry excessive risk; he explains how to check a brokerage statement for unusual activity; and why exotic or difficult to understand investment products present exceptional risk.

And finally, Allen explains, the greatest danger is thinking you know it all. Nobody ever knows everything. Rules and regulations are ever-changing, new products come on the market, and talented fraudmeisters continually find new ways to package old scams.

“What is most important – always be a skeptic and never assume that investment professionals are placing your financial interests ahead of their own,” Allen says. Furthermore, a grasp of investment fundamentals is well within the capability of most of us.

The possibility of fraud shouldn’t discourage anyone from investing. A well-informed up-to-date individual investor can, and should, prosper from participating in investment markets.


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