Avoiding Financial Scams

November 12, 2013

Post-Madoff, investors still face a minefield of threats.

Physicians have long been attractive victims to scam artists.

With more money and less time to manage it than many other professionals, doctors fall prey to advisers who charge too much, cut ethical corners, or worse. They buy into too-good-to-be-true tax schemes, construct needlessly complex trusts, or reach for stellar returns from investments that turn out to be Ponzi schemes.

Henry Backe, an orthopedic surgeon, told the United States Committee on Banking, Housing, and Urban Affairs the retirement plan at his Fairfield, Conn., practice tried to do all the right things to avoid such a fate for its 15 partners and 125 employees. Plan documents were filed on time and audited by the Labor Department and by a private firm. In 1992 the practice hired an investment advisory firm that was regulated by the Securities and Exchange Commission (SEC).

The name at the helm? Bernard Madoff.

"This is the last thing a medical practice needs when treating patients," Backe told the committee in January 2009, describing the myriad distractions created by the Madoff scandal, thought to be one of the largest Ponzi schemes in history.

Four years later, however, Backe says his group has recovered 74 percent of the plan's net investment. The recovery was a combination of settlements and selling claims in the distressed debt market. While he says employees and colleagues were thrilled with the recovery amount - scam victims rarely recover anywhere close to their initial investment - the experience was painful.

"It was devastating," Backe recalls, ticking off several lessons the group learned the hard way. Among them was to never put pension money in a pooled account, which qualified the plan for far less protection by the Securities Investor Protection Corporation than if each employee had a separate account.

Though huge, the Madoff case was just one of many scams, and the Connecticut doctors are just a few among many physician victims of those scams. Fortunately, experienced physicians and their financial advisers are keener to fraudulent schemes, and have some solid tactics in place to prevent them.

Scam magnets

There are more stories of physicians being scammed than can fit into the pages of this story, though certain ones have left an eerie aftertaste in the psyche of medical practitioners.

One example: In 2011, Alabama authorities charged an emergency room physician with multiple securities violations after he allegedly persuaded other physicians to invest money with him for unregistered securities, says Joseph Borg, the state's securities commissioner.

"They have money and are used to heavy decision-making responsibility every day," Borg says of doctors.

So while physicians are often reluctant to hand off quarterbacking duties for their financial lives, they don't have the time to manage things closely and neglect the most basic background checks, he says.

Adding a bit of irony to injury, doctors themselves are now being asked to help flag signs of swindles in their patients.

More than 3,000 physicians have completed a training program in identifying elderly patients' vulnerability to fraud. The program was created through a partnership between the Investor Protection Trust (IPT), state securities regulators, and a national protective services association.

Geriatrician Rebecca Elon, who has been through the training, says the program helps doctors formalize the intake questionnaire and ask questions in a way that can unearth financial troubles patients already have but may be too embarrassed to admit, or early signs of cognitive decline that could lead to patients becoming fraud victims.

As a side bonus, she says it also keeps her alert about avoiding scams herself.

"The program is getting attention from doctors who have been victims themselves, who want to reach out to patients and make sure they don't become victims," said Don Blandin, IPT president.

Elon has had family members and patients who have fallen victim to scams, which she says made her passionate about protecting the elderly from abuse, particularly as the scientific community learns more about the the aging brain.

"When you see something like this, you see how vulnerable we are," she says.

And some investor advocates fear the landscape may grow even more treacherous, particularly for affluent investors, under federal legislation allowing broader advertising of certain types of securities, such as hedge funds.

Under the Jumpstart Our Business Startups Act, sellers of unregistered securities can advertise them widely, as long as they take reasonable steps to ensure that buyers are so-called accredited investors.

Accredited investors are defined as those earning more than $200,000 individually or $300,000 with a spouse, or whose net worth exceeds $1 million.

"Before, you only had access to these securities under an existing relationship with the issuer," said Barbara Roper, director of investor protection for the Consumer Federation of America.

Spotting good investments

As regulators hammer out the final details of implementing the legislation, she says, broad swaths of affluent Americans could be enticed to get into highly speculative investments.

While they may not be outright scams, they may be far riskier than your portfolio can or should handle, even if you have the qualifying income or assets, consumer advocates warn. Examples of investments offered to accredited investors include hedge funds and private placements, which are basically off-exchange securities sold directly to investors. Under the new law, these investments can be advertised widely, even though the income limits are still in place for purchasing them.

That means you could see them pitched at or near medical conferences and meetings, or by investment advisers who invite you for a free lunch or dinner to hear about "new investing strategies for an uncertain market."

The best way to avoid either scams or unsuitable investments is to keep in mind the red flags: signs that the deals just sound too good to be true.

Often investors will hear a pitch that sounds plausible - say a new fracking technique in the oil and gas industry - and because the trend itself has been in the news, the investor jumps at it without checking out the person, Borg says.

"It's putting the emphasis on the wrong aspect of the deal," says Borg.

 In addition to keeping an eye out for red flags, there are other steps physicians can take to avoid scams.

Steering clear of major pitfalls starts with fairly basic background checks of both the person offering advice or investments and the investments themselves, says Borg.

For example, if someone leaves a phone message asking to talk with you about investments, call the SEC or your state's securities regulator (or go online at www.sec.gov) and confirm the person is actually licensed before even returning the call, says Borg.

"Even without fraud, a significant number of these companies are just not going to make it," she says of startups in which physicians and their hedge funds invest and other types of unregistered securities. "By definition, doctors are smart people, but are they financially sophisticated enough that they don't need [audited] financial statements to understand the risks in a marketplace they may not have any experience in? This is a poorly supervised market with a significant history of fraud." When considering hiring a financial adviser, put detailed questions to their references - even if they are your colleagues or friends - about the type of work the adviser performed, says Mark Goulston, a psychiatrist and author of "Real Influence: Persuade Without Pushing and Gain Without Giving In."

"Then say to the adviser, 'Tell me something you shouldn't tell me about this investment,' or 'Give me some examples of the type of investor this strategy didn't work for and those it did work for,'" Goulston says. "You don't want to be someone's research and development department, so you want to get specific examples" of a track record, he says.

Individual investors can also learn from Backe's experience with the retirement plan and SIPC insurance.

Ask for documentation showing your account isn't pooled with other customers' funds, experts advise.

Protect your assets

Backe also urges practice leaders to make certain their retirement plans employ an independent custodian, and to hire professional investment managers as plan fiduciaries, not physicians themselves.

For individual accounts, physicians can get referrals to advisers who have undergone background checks under a program called Physicians Financial Partners, created by the AMA Insurance Agency (AMAIA), a subsidiary of the American Medical Association. The association solicits ongoing feedback from physicians who use the service, a program official says.

It's important to understand the scope and limitations of this or any other adviser endorsement, however.

The roughly two dozen firms in the program pay fees to the AMAIA as part of the arrangement, for example, and may be transaction-based brokers earning commissions on what they sell you. Officials say the fees help defray costs and ensure advisers have a vested interest in making the program work, but anytime money changes hands investors should consider the possible conflicts of interest.

It's still up to you to decide if that model is best for your situation, or whether it makes more sense to engage an adviser with a fiduciary standard to put your interests first. That person may be paid hourly, or, more likely, based on a percentage of your assets under management. And remember, even advisers with this business model, like Madoff, can be scam artists.

"We find a lot of doctors who would rather just eat the loss instead of facing the reputational damage" of a scandal investigation, Borg says.

The next time you entrust your money with someone, think about whether you can afford either scenario.

In Summary

Physicians have long been attractive victims to scam artists. Here's what to consider when arming yourself against financial scams:

• Highly speculative investments may be far riskier than your portfolio can handle, even if you have the qualifying income.

• Hire professional investment managers as plan fiduciaries, not physicians themselves.

• Understand the scope and limitations of any other adviser endorsement.

• Anytime money changes hands investors should consider the possible conflicts of interest.

Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. She holds a bachelor's degree and master's degree from the Medill School of Journalism at Northwestern University. She can be reached at editor@physicianspractice.com.

This article originally appeared in the November/December 2013 issue of Physicians Practice.