Gaeton Della Penna met many of his clients through his church. The Sarasota, Florida, financial advisor took their $3.8 million and promised safe investments with returns of at least 5 percent a year.
Instead, in May 2014, the U.S. Securities and Exchange Commission charged him with using some of the money on mortgage payments for his 10,000-square-foot home. Much of the rest was lost in risky trades. A year later, Della Penna pleaded guilty to running a Ponzi scheme. Last week, he was sentenced to almost six years in jail.
Malicious people rarely twirl their mustaches with glee. Incompetent advisors often speak and dress well. How do clients know whether to trust someone with their money?
The question is at the heart of a debate in Washington over how financial advisors should be regulated. The Obama administration wants to require all advisors who handle retirement funds to promise to act as fiduciaries, a term for advisors who put their clients' interests first. (It isn't foolproof. Bernie Madoff claimed the fiduciary designation at one point.) The financial industry and members of Congress are fighting the proposal.
While they hash it out, here are some tips experts tell clients to watch out for.
Don’t Rely On The Classic Tells
Shifty eyes and nervous sweating aren’t necessarily signs, or the only signs, of a lie in progress. Clues from speech or behavior help subjects of lab studies tell the difference between lies and truth only 54 percent of the time, hardly better than chance. Lie detector machines can be gamed.
Academic studies contradict most people’s intuition about what lying looks like. “Even in law enforcement, they still teach stuff that doesn’t work,” said Jason Voss of the CFA Institute, an organization for investment professionals that is working on techniques to help its members catch liars and cheaters.
Do Pay Attention To That Creepy Feeling
By looking for liars with our eyes and ears only, we may be distracting ourselves from a better gauge of the truth. Our subconscious may do a better job, according to a 2014 study by researchers at the University of California, Berkeley Haas School of Business. If you have a vague feeling that something’s not quite right, trust your gut and do some extra research.