1

2 Does the Suit Mean Honesty? Spotting Inappropriate Investments and working with your Financial Professional

3 The Maine Office of Securities Part of Maine’s Department of Professional and Financial Regulation A source of objective and impartial information Part of Maine’s Department of Professional and Financial Regulation A source of objective and impartial information

4 Useful brochures on our website Five Keys to Investing Success A Primer for Investing in Stocks A Primer for Investing in Bonds Mutual Funds May be all You’ll Ever Need Getting Help with your Investments Maximize Your Retirement Investments Five Keys to Investing Success A Primer for Investing in Stocks A Primer for Investing in Bonds Mutual Funds May be all You’ll Ever Need Getting Help with your Investments Maximize Your Retirement Investments

5 Topics Covered What the Office of Securities does The Rise of investment abuse Types of financial professionals and their obligations Finding a financial professional and questions you should ask Record keeping Warning signs What the Office of Securities does The Rise of investment abuse Types of financial professionals and their obligations Finding a financial professional and questions you should ask Record keeping Warning signs

6 The Mission of the Maine Office of Securities Protection of Maine investors Licensing financial professionals Reviewing registration statements and exemptions filings Investor education Protection of Maine investors Licensing financial professionals Reviewing registration statements and exemptions filings Investor education

7 How the Maine Office of Securities can help you Verify whether your financial professional is licensed Provide you with disciplinary history Examinations Prior work history Red flags Formal enforcement actions Informal assistance Verify whether your financial professional is licensed Provide you with disciplinary history Examinations Prior work history Red flags Formal enforcement actions Informal assistance

8 The Rise of Investment Abuse Weaker returns in the stock market Shortfalls in retirement money Investment decisions based upon fear or greed Fewer government resources since 9/11 Financial illiteracy Weaker returns in the stock market Shortfalls in retirement money Investment decisions based upon fear or greed Fewer government resources since 9/11 Financial illiteracy

9 Why Directed at Seniors? “That’s where the money is.” More trusting generation Perception that you are an “easy target” Demographics – more of you “That’s where the money is.” More trusting generation Perception that you are an “easy target” Demographics – more of you

10 Types of Investment Abuse Inappropriate investment recommendations Misrepresentation of risk Churning Unauthorized trading Failure to execute Inappropriate investment recommendations Misrepresentation of risk Churning Unauthorized trading Failure to execute

11 More Serious Forms of Investment Abuse Ponzi schemes Sham promissory notes Pump and dump market manipulation schemes Prime bank schemes Ponzi schemes Sham promissory notes Pump and dump market manipulation schemes Prime bank schemes

12 Examples of Investment Abuse in Maine The Portland Attorney Use of position of trust The Gourley case Securities are broadly defined The Portland Attorney Use of position of trust The Gourley case Securities are broadly defined

13 Techniques used by Scam Artists Undercover tape Tactics used Phantom fixation (dangling prospect of wealth and riches) Scarcity (marking the product offered seem rare to increase its value) Source of credibility (claiming to be from a known legitimate business) Comparison (juxtaposing a more expensive price with the offered price) Reciprocity (the con will do a small favor putting pressure on the victim to reciprocate) Landscaping (structuring the interaction leading to where the con wants to go) Profiling (identifying victim’s psychological buttons through extensive questioning) Fear (use of fear and intimidation to persuade) Authority (con plays the role of authority figure) Dependent (con plays the role of young helpless dependent) Undercover tape Tactics used Phantom fixation (dangling prospect of wealth and riches) Scarcity (marking the product offered seem rare to increase its value) Source of credibility (claiming to be from a known legitimate business) Comparison (juxtaposing a more expensive price with the offered price) Reciprocity (the con will do a small favor putting pressure on the victim to reciprocate) Landscaping (structuring the interaction leading to where the con wants to go) Profiling (identifying victim’s psychological buttons through extensive questioning) Fear (use of fear and intimidation to persuade) Authority (con plays the role of authority figure) Dependent (con plays the role of young helpless dependent)

14 Financial Professionals’ Responsibilities Honesty and fairness What does this mean? Full and accurate information about the investment Disclosure of risks Disclosure of costs Disclosure of obligations and restrictions Suitable recommendations Accurate records Honesty and fairness What does this mean? Full and accurate information about the investment Disclosure of risks Disclosure of costs Disclosure of obligations and restrictions Suitable recommendations Accurate records

15 Selecting a Financial Professional Do you need one? Types of financial professionals: Investment advisers Broker-dealers Do you need one? Types of financial professionals: Investment advisers Broker-dealers

16 Differences between Investment Advisers and Broker-dealers Investment advisers are fiduciaries – they must put your interests first Compensation Investment advisers are fee-based Broker-dealers receive commissions A broker-dealer’s conflicts of interests Potential to over-trade Tied to particular securities products Investment advisers are fiduciaries – they must put your interests first Compensation Investment advisers are fee-based Broker-dealers receive commissions A broker-dealer’s conflicts of interests Potential to over-trade Tied to particular securities products

17 Differences, continued No such conflicts with investment advisers One conflict may be a desire to manage all of your assets when not in your best interests No such conflicts with investment advisers One conflict may be a desire to manage all of your assets when not in your best interests

18 Investment Advisers How they charge: a percentage of assets under management Example: 1% of $100,000 yearly equates to a fee of $1,000. How they charge: a percentage of assets under management Example: 1% of $100,000 yearly equates to a fee of $1,000.

19 Types of Broker-dealers Full-service Discount brokers Online brokers Full-service Discount brokers Online brokers

20 Types of Broker-dealers, continued Full-service brokers – will pay higher commission Discount brokers – no specific recommendations Online brokers – internet trading only Full-service brokers – will pay higher commission Discount brokers – no specific recommendations Online brokers – internet trading only

21 Types of Investment Advisers Financial planners Provision of financial plan Relationship is not ongoing Usually hourly fee, or hourly fee with a cap You are responsible for executing Financial planners Provision of financial plan Relationship is not ongoing Usually hourly fee, or hourly fee with a cap You are responsible for executing

22 Types of Investment Advisers, continued Portfolio Manager Will manage your assets On an ongoing basis Will generally charge you a percentage of your assets Generally, have discretionary authority Portfolio Manager Will manage your assets On an ongoing basis Will generally charge you a percentage of your assets Generally, have discretionary authority

23 Finding a Financial Professional Yellow pages If investment adviser, any credentials? CFP (Certified Financial Planner) ChFC (Chartered Financial Consultant) CPA (Certified Public Accountant) PFS (Personal Financial Specialist) Be wary of “Senior Specialist” designations Yellow pages If investment adviser, any credentials? CFP (Certified Financial Planner) ChFC (Chartered Financial Consultant) CPA (Certified Public Accountant) PFS (Personal Financial Specialist) Be wary of “Senior Specialist” designations

24 Finding a Financial Professional, continued References from Family, friends, co-workers Lawyers, accountants, insurance agents Always check first with our Office! References from Family, friends, co-workers Lawyers, accountants, insurance agents Always check first with our Office!

25 Other Organizations that may Assist The Financial Planning Association The National Association of Personal Financial Advisors The American Institute of CPA’s The Society of Financial Service Professionals The Financial Planning Association The National Association of Personal Financial Advisors The American Institute of CPA’s The Society of Financial Service Professionals

26 Questions to Ask Fee structure Investment record Other clients How would they invest? Demeanor Fee structure Investment record Other clients How would they invest? Demeanor

27 How to Deal with your Financial Professional Give the matter your full attention Does the suggestion fit in with your investment plan? Ask for more information Give the matter your full attention Does the suggestion fit in with your investment plan? Ask for more information

28 Record-keeping Log of all conversations Documents and statements s/notes Clippings/research reports Always review statements promptly and thoroughly and have mistakes corrected Log of all conversations Documents and statements s/notes Clippings/research reports Always review statements promptly and thoroughly and have mistakes corrected

29 Warning Signs Guarantees investments Puts money into one investment only Argues with you or ignores your instructions Is vague about commissions or fees Requests you to sign documents without giving you the opportunity to read them Guarantees investments Puts money into one investment only Argues with you or ignores your instructions Is vague about commissions or fees Requests you to sign documents without giving you the opportunity to read them

30 Conclusion Clear communication is the key Two-way obligation Always be candid and specific about goals and financial assets Let your financial professional know about major changes affecting your financial situation Let your financial professional know about your comfort level with investment risk Make sure you always understand any investments recommended Clear communication is the key Two-way obligation Always be candid and specific about goals and financial assets Let your financial professional know about major changes affecting your financial situation Let your financial professional know about your comfort level with investment risk Make sure you always understand any investments recommended

31 Any questions?