Financial Scams

Question: In your career as a financial advisor, what is the worst financial scam you have seen?

Answer:    In my 30 plus years as a financial advisor and CPA, there have been many instances when I have had the satisfaction of helping clients avoid the clutches of thieves with cleverly devised plans to separate them from their money.  Unfortunately, by the time a reputable financial advisor is consulted,  it is often too late and the money has been stolen, almost never to be recovered.

Financial scams go by many names and take many forms. We hear of confidence games, Ponzi schemes, pyramid schemes, bogus investments, sweepstakes schemes, identity theft, etc.  Financial scams surely go back to the dawn of time as there have always been unscrupulous people willing to prey on the needy, the naive,  and the unsuspecting. The Bible contains several examples of financial scams, such as in the parable of the dishonest steward in Luke chapter 16.

There are so many varieties of financial scams that discussing them all would require a thick book instead of this blog, so I will comment on one of the most clever and remarkable scams I have uncovered.

Let us assume that you are a respected business owner who wants to expand  your business but needs additional capital to really make it big.  This is well known, and a friend or business acquaintance, mentions that he or she knows someone who knows someone that specializes in “unconventional financing.” Eventually you are put in contact with the “financing specialist” and a meeting is arranged. The person you meet beams with confidence, has a firm handshake and looks you right in the eye. You are impressed with his  experience and resume. The specialist carefully listens to your needs and proposes several different courses of action to help you. You come to trust this person, who seems honest and sincere and often peppers his speech with religious references and Bible verses, and constantly talks about family. Almost reluctantly, the specialist tells you of  a special program he knows about that would be wonderful, IF you can be qualify and IF you are accepted. He promises to look into it for you.

The specialist comes back to you several days or weeks later with a thick folder of legal looking documents. He tells you that there is a “secret program for trading United States Treasury securities.”  You are told that the  federal government only allows a handful of people to participate each year as the rate of return is so high.  You make your money by investing $200,000 in the program. Your investment “rolls over” several times a day, so that you may make as much as $20 MILLION in one year, depending upon the interplay of the interest rate set by the Federal Reserve and foreign currency exchange rates.  No one is allowed to participate for more that one year. You are shown impressive looking charts and  graphs. The specialist tells you that due to government confidentiality requirements, he cannot give you a copy of the material, but you are free to examine it in his presence. He further tells you that if you set up an off-shore foreign corporation to make your investment, then the earnings will not be subject to U.S. taxes.

 The specialist has a “government currency trader” call you, and that person speaks rapidly and makes you feel ignorant and unsophisticated because you do not quickly grasp how the program works. The specialist then has a “retired federal judge” call you to determine your suitability to participate in the “secret program.” By now, you are eager to get started making this huge sum of money. You happily wire the specialist his “modest” $20,000 commission to his off-shore bank account, and arrange with your bank to wire $200,000 to your offshore corporation, which the specialist has  set up.  All  the money transfers, and you wait for your profits to start. And you wait, and wait, and wait………..
WHAM! You have been scammed!  THERE IS NO “SECRET PROGAM” FOR TRADING U.S. TREASURY SECURITIES. Never has been. You are the victim of clever, polished, articulate con men and women who specialize in  swindling educated business and professional people. You had a need for funding.

The con man gained your confidence and made you want to believe
him. Angry and embarrassed, you contact the FBI. The FBI agent assigned to your complaint is sympathetic, but gives almost no encouragement for recovery of your funds. She has heard this sad tale many times before, and knows that the con men have carefully covered their tracks, and your money had disappeared.

The lesson here is simple: If it sounds too good to be true, then it is. ALWAYS consult with a trusted financial advisor, CPA or attorney. ALWAYS! 

ETHICAL WILLS: “Putting Your Values on Paper”

At turning points in our lives, many of us ask ourselves questions of the heart and soul.
       
Have I fulfilled my purpose?
       
What will I be remembered for?
       
What kind of legacy have I passed along to my family and others?

An ancient tradition for passing on personal values, beliefs, blessings, stories,    and advice to relatives and for future generations, an ethical will can mean more to friends and family than any material possession we could bequeath to them.

A legal will (“Last Will and Testament”) should always be prepared by an attorney and bequeaths property. A living will is a document that contains specific instructions about medically related issues. Both legal wills and living wills are legal documents under the law. An ethical will is not  a legal document; however what all three types of documents have in common is the fact that they provide instructions to other as to the intentions of the author. Legal wills bequeath valuables, while ethical wills bequeath values. Ethical will are also called “loving wills” or “personal values wills.” Ethical wills offer a communication link between the generations.

What’s in an ethical will? Why not include your philosophy, affection and values in your estate planning documents?  Every estate plan reflects transfers of personal values, good or bad, to future generations. Values are not permanent. They must  continuously be strengthened, changed, or refined.  Consider leaving a lasting written reminder of the personal values you believe to be most important.  As you think about what you might include in your own ethical will, you need to realize that there will be contributions from your past, present and future. Some of our values and beliefs have been passed on to us from our predecessors. Our own life experiences shape our character and help form a foundation of our values and principles.  Looking into the future, ponder what we might yet become and what we have left to do.


Here are some common themes found in ethical wills:

Common themes from our past:

• Meaningful personal or family stories
• Lessons learned from personal or family experiences
• Regrets

Common themes from the present:

• Personal values and beliefs
• Values and beliefs of the author’s faith community
• Expressions of love and gratitude
• Apologies

      Common themes for the future:

• Blessings, dreams ,and hopes for present and future generations
• Advice and guidance
• Requests
• Funeral plans

Here is a sample format for your ethical will:

ETHICAL WILL OF

(YOUR NAME) 

Dear_________________________________
If I had the choice to give you personal values or worldly goods, I would give personal values.  With personal values, you get worldly goods and much more.  Personal values include faith, loyalty,  honesty, ability, compassion, sportsmanship, and I hope, a sense of humor.

I have fully enjoyed life, being blessed with exceptional family  and friends. During my lifetime, I tried to make a difference. Hopefully, I have had some success in giving to  you and to future  generations the personal values I believe to be important. Perhaps these words will remind you of choices.

I give the following personal values to those who will accept them:
            Religious faith  (explain)
            Loyalty (explain)
            Love (explain)
            Honesty (explain)
            Work ethic (explain)
            Curiosity (explain)
            Compassion (explain)
            Civility (explain)
            Sportsmanship (explain)
            Sense of humor (explain)
            Creativity (explain)
            Patriotism (explain)

   Thrift (explain) 

   Other (explain
 

Date____________________________    Signature_________________________ 

Location________________________
 

Prepare your own Ethical Will now.  Review it and change it regularly. Transfer

the same values while you are alive.  Make sure that selected loved ones and

friends read it now or later. 

Children and Inheritance: How to help make sure you never have a daughter (or son) like Paris Hilton

Most of us are familiar with the sad spectacle of the downward spiraling life of Paris Hilton.  This young woman had the good fortune to be born into one of the richest families in America. To be blunt, she has brought shame to her family and disgrace to herself by flaunting a lifestyle of conspicuous consumption and wild behavior. A few months ago, she received much media attention as she was hauled off to jail, screaming and wailing like a spoiled toddler. While some will no doubt defend Paris’ right to be a free spirit, I take a more old fashioned view. In the Gospel of Luke we read: “For everyone to whom much is given, from him much will be required; and to whom much has been committed, of him they will ask the more.” (13:48). Now let us look at a contrast.

At the beginning of the 20^th century, oil baron John D. Rockefeller was the richest man in America. Instead of leaving generations of spoiled, pampered lay-abouts, he left a legacy of children and grandchildren who were governors, a U.S. Vice President, a U.S. Senator, educators, business executives and philanthropists.

Now, I can hear some of you dear readers saying:” OK, Robert, that’s interesting, but we don’t have any Hiltons and Rockefellers in West Tennessee.” To this I reply: “No, we don’t, but no matter the size of the inheritance,  beneficiaries need to be protected from the same things. They need to be protected from other people and from themselves.”  It has been my experience that most families actually have more in assets than they realize. It is indeed true that we don’t see great industrial fortunes in West Tennessee. However, with 401(k)s, IRAs, life insurance, and real estate, many families have significant assets.  All parents should be concerned with how inheritance will affect the lives of their children. Some children are able to responsibly manage money at  age 18, while others are unable to at age 58. Research has shown that most people who receive significant amounts of money, whether by inheritance or by winning the lottery, do not keep it. Sixty per cent burn through their money by the second generation, and ninety per cent by the third generation.  Surely there is a better way!

Now I don’t know where the Hiltons went wrong in raising Paris, but I do know what Rockefeller did right. He successfully passed on to his descendents the virtues of hard work and civic responsibility.  Several generations of Rockefellers have been useful, productive citizens who not only carefully managed their considerable inherited wealth, but also used it to benefit and improve society as a whole. Long before the term “giving back” became a popular buzz word, the Rockefeller family was doing just that.

Patriarch John D. Rockefeller did at least two things that influenced his family’s attitudes toward the use of money. First, he started a family tradition when his children were very young. He held regular scheduled family meetings to discuss finances with his children. Now, this is one of the hardest things for parents to do.  Most parents find it far easier to talk to their children about sex than about money. We avoid talking about money because such talk so often leads directly to tension. It is so hard for us to talk to others, especially our children, about what money ---earning it, inheriting it, spending it, saving it, gifting it---means to us. Why is this?  Well, we happen to live in a society and culture with money as its center. Not only do we tend to judge others economically, we judge ourselves as well.  When the topic of money is brought up in the family, issues of shame, fear and guilt often appear. For many of us, money has multiple meanings, some obvious and some not so obvious. Money can mean personal security, freedom from want, and the ability to help others. It can also mean greed, revenge, dependence, jealously, favoritism, vulnerability, and deception.  Our attitudes about money shape our values and behavior, and these deep feelings become the blueprint for how we live our lives from a financial perspective. Our beliefs and ideas about money come to us from our families, and while children listen to what their parents say, they place more importance on what they see their parents do. If we are not articulate in communicating financial decisions within our families, issues can lay dormant, waiting to confront us in the future.

Ideally, parents should start the tradition of family meetings when children are as young as five or six, keeping the meetings short and fun. The guiding purpose should be to instill values, not to lecture. Children can learn by way of example how careful management of money is a key to success. Teenagers may think family meetings are weird at first, but will later come to appreciate being included if the parents take it seriously and if everyone’s opinion is given some weight. Grown children will appreciate being part of the family decision making process instead of wondering what they will find when they finally get access to their parents financial matters. Family financial meetings are not just for the wealthy; all families can benefit from honest and open communications about money vales and practices. Before each meeting, prepare a written agenda, and keep notes of the meeting. At the end of a meeting, decide what everyone is supposed to do before the next meeting. Years of such meetings will give parents the confidence that their children will be able to handle money. If you are uncomfortable with the idea of holding family meetings, ask a trusted financial professional, such as your attorney, CPA, or investment advisor to facilitate them.

The second thing that Rockefeller did to protect his heirs from misusing an abundance of money involved the wise use of trusts. He left the majority of his wealth in a series of trusts that insured that it would stay in the family for generations.  Like family meetings, trusts are not just for the wealthy. Trusts are created to protect beneficiaries from creditors, from predators, and from themselves.  Parents who are worried that their children may not use an inheritance wisely may find that trusts offer reassuring alternatives to direct bequests of large sums of money. For example, a trust may include a “spendthrift clause” that keeps the trust assets from being subject to the claims of the beneficiary’s creditors. With such a clause in place, the beneficiary cannot pledge the trust assets for his or her debts, including alimony.  Trust may contain provisions that ensure that children and grandchildren use their inheritance in ways that the grantors of the trust would prefer. For example, trust distributions can be tied to educational expenses, home purchases, medical expenses, or matching retirement account contributions.  Trust provisions can also tie distributions to the beneficiaries’ earnings or community service, to help ensure that they become useful, productive citizens. Trusts can also dole out cash in installments, rather than all at once.  For example, money can be distributed to beneficiaries in thirds, such as one third at 30, the second third at 35, and the balance at 40. Trusts can also offer significant tax advantages, often combined with charitable remainder features.

Critics of trusts say that they are rigid, full of administrative costs, and make heirs feel like their parents or grandparents are trying to control things from the grave. I have personally been involved in the administration of trusts for many years, and assure you that in almost all cases, the benefits of trusts far outweigh any of the downsides. Trust documents can and should be drawn to provide flexibility. So very often the trust provides the beneficiaries with much needed financial management and guidance until they gain the maturity and experience to manage their own funds.

The sad example of Paris Hilton need not be repeated in your family. Begin by taking the appropriate steps to instill the right values about money in your children. Talk to them about money. Help them learn to manage it. Don’t hesitate to use trusts for their financial protection. Your thoughtful actions can help insure that money becomes a blessing to your children instead of a curse.