How to find a financial advisor who won't make your money disappear


Of all the professionals we entrust with various aspects of our lives, few hold more sway than a financial advisor. A good one can show you how to turn your hard-earned cash into a secure financial future.

"Buying a house, graduating from college, seeking retirement, supporting individuals that may be dependents of yours. There's so many reasons why someone needs to have a better understanding of their financial future," Fordham University accounting professor Barbara Porco told CNBC's "American Greed."

But then there are advisors like Dawn Bennett.

A radio show host who was listed by Barron's as one of the nation's top financial advisors, Bennett, 57, was in fact running a massive Ponzi scheme. Prosecutors said that rather than investing her clients' money as she claimed, she spent much of it on her outrageously lavish lifestyle including clothes, shoes, and a $500,000-a-year luxury suite at AT&T Stadium, home of the Dallas Cowboys. She also persuaded clients to invest millions in her online luxury sporting-goods business, which ended up being a spectacular flop.

It turned out that she earned the coveted Barron's rankings — not to mention millions of dollars in credit lines — by vastly overstating her finances. At least 46 people invested some $20 million, and Bennett lost or spent almost all of it.

"This was money that these folks had set aside for ailing family members, for their own long-term care, for their grandchildren's education, so that they could retire and so that they wouldn't have to return to the workplace," Assistant U.S. Attorney Erin Pulice told "American Greed." "So, the loss of these funds was just absolutely devastating."

Bennett even spent some of her money on religious ceremonies and other rituals including something called a "beef tongue shut-up hoodoo spell," which, as the name implies, employed a beef tongue, various spices and incantations apparently aimed at getting investigators to hold their tongues and stay silent. The spells did not work.

A jury convicted her in 2018 on 17 counts. including fraud, conspiracy and making false statements. She is serving a 20-year prison sentence while she appeals the verdict. A judge ordered her to pay $14.5 million in restitution to her victims.

"I would love to see Dawn Bennett face to face again in jail," said author and relationship expert Steve Santagati, who lost more than $1 million. "I want to look her in the eyes as a victim of her theft and just be able to say, 'I know. We all know who you are now.'"

Choose wisely

To avoid your own Dawn Bennett-style nightmare, Porco said investors should put prospective financial advisors to the test. Even though you want an advisor who will be able to answer all your financial questions, start by asking questions you know the answers to.

"Ask them what the difference between nonqualified dividends and qualified dividends are. Ask them the tax difference," Porco said. "If they give you the correct one, that'll make you feel good, but if they don't, I think you need to rethink your financial advisor."

(For the record, a qualified dividend is one that is paid by a U.S. corporation or a foreign corporation that has a tax treaty with the United States. Qualified dividends are taxed at the same, lower rate as capital gains. Other dividends are nonqualified and are taxed as ordinary income.)

Be sure to look into your advisor's past. The Financial Industry Regulatory Authority offers an online tool to check a professional's disciplinary record, including customer complaints. FINRA's system is not foolproof, but it can help weed out advisors with checkered backgrounds.

If the advisor passes those tests, it is time for some bigger questions. One of those involves how your advisor will be paid. If you are a novice with only a small amount of money to invest, you might be able to find an advisor who will take you on at no charge with the idea that you will become a paying customer later.

Otherwise, Porco suggested finding an advisor who will charge a flat fee based on their time, or on the amount of money in your portfolio.

"One percent would probably be appropriate," she said.

Beware of fee structures that sound too good or do not align with the market.

"You want to make sure that the fee structure is appropriate and the person that you're working with doesn't start using language like, 'You're very special to me,' or 'I have an exclusive deal that I think is just perfect for you,' or if there's an air of secrecy about the investment strategy, those kinds of things might be very uncomfortable," Porco said.

Loyalty test

You have the right to know how your advisor is compensated. Some financial advisors receive a portion of their compensation through commissions, and while there is nothing inherently wrong with that, it could be an incentive for them to excessively trade your account or steer you toward financial products that may not be the best for your situation.

To make certain your advisor's loyalties are not misplaced, look for someone who is registered. Look for the designation RIA (Registered Investment Advisor) or CFP (Certified Financial Planner). The idea is to find an advisor who will act as your fiduciary.

"When you have fiduciary responsibility, what you're saying is that, 'I'm going to put your interests above mine, above my firm's, above the companies that I'm interested in investing in. Your interest is paramount in the decisions that we will make together'," Porco said.

The Securities and Exchange Commission requires most financial advisors to operate under the fiduciary standard, but there are exceptions. Certain advisors — including those employed by broker-dealers — can operate under the less rigorous "suitability standard," which requires them to make recommendations that are appropriate for your financial situation. Make certain you understand which standard your advisor follows.

The idea is to sniff out any conflicts that might separate your advisor's interests from your own.

"In order to guard against a conflict of interest, you need to know about it," Porc saod. "So I often recommend to people to keep a certain skepticism when you meet individuals when you're trying to vet your financial advisor."

In Bennett's case, some of the conflicts were blatant, including selling her clients promissory notes tied to her online luxury apparel business.

"She was encouraging individuals that were investing with her in the financial markets and in funds, taking money out of those investments and taking that portfolio fund and moving it into her personal investment," Porco said.

On guard

Once you have chosen an advisor, your work has only just begun. Keep tabs on your investments' performance. Read your account statements. Ask questions about the recommendations your advisor makes.

"If your financial advisor is continually encouraging to reinvest or discouraging to withdraw from money that would give me a pause, because with Dawn Bennett, ultimately what she was doing is conducting a gigantic Ponzi scheme," Porco said. "So, if your financial advisor continually discourages you from removing any of your own cash, pause and think about why, and if they can't give you a good answer, find someone else."

See how Dawn Bennett worked her magic on dozens of investors, making $20 million disappear. And learn how a "beef tongue shut-up hoodoo spell" is supposed to work. Watch an ALL NEW episode of "American Greed," Monday, Feb. 10, at 10pm ET/PT only on CNBC.