Protecting Yourself from Popular Financial Advisor Scams

Popular Financial Advisor Scams and How to Protect Yourself from Them

Financial Advisor ScamsAs discussed in the previously published Summit blog entitled “3 Warning Signs It’s Time to Fire Your Financial Advisor (Part 1 of 2)”, while most financial advisors are trustworthy and committed to the best interests of their clients there are unfortunately also some bad apples in the financial planning industry. University of Chicago finance professor and past American Financial Association (“AFA”) president, Luigi Zingales, bluntly stated in his 2015 AFA presidential address: “I fear that in the financial sector fraud has become a feature and not a bug.”[1]

The following are some of the most common financial advisor and investment advisor scams and ways you can help protect yourself from them:

Ponzi Scheme

The U.S. Securities and Exchange Commission (SEC) defines a Ponzi scheme as “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.”[2]

It’s easy to fall prey to a scamming financial advisor who is nothing more than a Ponzi swindler. Case in point: the infamous Bernie Madoff case. Madoff was once a highly-respected and recommended investment and financial advisor, obtaining stellar investment returns for his Rolodex of rich and elite clients. Turns out, these stellar returns were part of an elaborate Ponzi scheme—with Madoff using the money from new, incoming investors to pay off the promised, “earned” returns of older investors. Pursuant to the criminal complaint, Madoff defrauded his trusted clients of nearly $65 billion, making it the largest Ponzi scheme in history as well as the biggest case of investor fraud carried out by one person. While the Madoff case is an extreme example of a financial advisor taking advantage of his or her clients, it still doesn’t mean you can’t get swindled by your financial advisor. In fact, many of Madoff’s clients even had experience working in the finance industry, and yet they still got conned—so what’s to protect the average person working with a financial advisor from the same devastating fate?

According to the SEC, there are steps that one can take to avoid Ponzi schemes and other popular financial advisor scams and investment frauds. Regardless of whether you are a first-time or seasoned investor, you should always ask basic questions prior to committing your money to an investment and then verify the answers to the questions with information gleaned from independent, reliable sources. Before you invest your hard-earned money in an investment opportunity, at the bare minimum, start by asking these five questions:

  • Is the seller licensed?
  • Is the investment registered?
  • How do the risks compare with the potential rewards?
  • Do I understand the investment?
  • Where can I turn for help?[3]

Misrepresentation Scam

Another popular way financial advisors scam their clients and the unsuspecting public is through misrepresentation of their credentials. The financial planning industry is susceptible for this type of scam because there is not one across-the-board specific licensing or credential requirement to practice, but rather there are a slew of different financial planning designations including but not limited to: registered investment advisor (RIA), certified financial planner (CFP), chartered financial analyst (CFA), and certified public accountant (CPA), just to name a few.[4] Since the lay public is typically unaware or confused by this “alphabet soup of financial certifications”, they are not cognizant of the various requirements, licensures, ethics, and designations for this wide spectrum of certifications. In turn, this makes it relatively easy for someone to hang a shingle on the wall and open up a financial advisory or planning practice and obtain paying clients, all without having the requisite certifications, qualifications, and education to do so. Then, the scammer often either defrauds their naïve clients into buying fake products or suddenly closes up their business and walks away with the proceeds and client fees that he or she has obtained from clients.

This type of misrepresentation scam is so widespread that the SEC’s Office of Educations and Advocacy has even issued an official Investor Alert to warn potential investors that scammers may be fraudulently misrepresenting their backgrounds, credentials, licensures, and experience in order to lure investors to investment schemes.

So how do you protect yourself? Before investing your money, you must verify that the person trying to sell you an investment product or financial planning service is properly licensed and registered. Do not make investment decisions based just on that person’s assertions about his or her credentials or experience. This includes claims found on the Internet or in traditional media sources. Instead, do your own research: check out both the SEC’s Investment Advisor Public disclosure website and FIRNA’s BrokerCheck website to see if the person trying to sell you investment products or services is legitimately licensed and registered to do so and also research that person’s disciplinary history. You should also contact your state’s securities regulator to find out whether this person is licensed to do business with you in your state.

Churning Scam

Churning scams are popular because most traditional stock brokers are paid when their clients buy or sell a security; as such, these scamming stock brokers can be motivated to make unnecessary and excessive stock trades on behalf of their clients in order to pad their own pockets. Churning is illegal and unethical as it can both violate SEC Rules as well as other securities laws. According to the SEC, “Churning occurs when a broker engages in excessive buying and selling of securities in a customer’s account chiefly to generate commissions that benefit the broker.  For churning to occur, the broker must exercise control over the investment decisions in the customer’s account, such as through a formal written discretionary agreement.  Frequent in-and-out purchases and sales of securities that don’t appear necessary to fulfill the customer’s investment goals may be evidence of churning.”[5]

If you believe your financial advisor or investment advisor has been involved in one of the above discussed scams or another type of fraud or wrongdoing involving potential violations of securities laws, you can use the SEC’s Tips, Complaints, and Referrals website to submit information online to the SEC about the possible violation.

For more information on boutique independent broker dealer firm Summit Brokerage Services and our independent financial advisors, visit or contact us at (800) 354-5528.


About Summit Brokerage Services, Inc.

Summit Brokerage Services is part of Cetera Financial Group. Summit Brokerage provides a broad range of securities brokerage and investment services to primarily individual investors. Summit Brokerage also sells insurance products, predominantly fixed and variable annuities and life insurance through its subsidiary, SBS Insurance Agency of Florida. Summit Brokerage also provides asset management services through its investment advisor, Summit Financial Group, Inc.


About Cetera Financial Group

Cetera Financial Group® (“Cetera”) is a leading network of independent retail broker-dealers empowering the delivery of objective financial advice to individuals, families and company retirement plans across the country through trusted financial advisors and financial institutions.  Cetera is the second-largest independent financial advisor network in the nation by number of advisors, as well as a leading provider of retail services to the investment programs of banks and credit unions.

Through its multiple distinct firms, Cetera offers independent and institutions-based advisors the benefits of a large, established broker-dealer and registered investment adviser, while serving advisors and institutions in a way that is customized to their needs and aspirations.  Advisor support resources offered through Cetera include award-winning wealth management and advisory platforms, comprehensive broker-dealer and registered investment adviser services, practice management support and innovative technology.  For more information, visit

*”Cetera Financial Group” refers to the network of retail independent broker-dealers encompassing, among others, Cetera Advisors, Cetera Advisor Networks, Cetera Financial Institutions, Cetera Financial Specialists, First Allied Securities, Girard Securities, The Legend Group and Summit Brokerage Services.





[4] To learn the difference between a financial advisor and a financial planner, check out the previously published Summit blog entitled “Financial Advisors and Financial Planners: Is there a difference?”


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