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Banking Commissioner Warns Of Increasing Sophistication
Of Dishonest Investment Advisers

September 23, 1996

With more Connecticut residents taking charge of their investment portfolios than ever before, State Banking Commissioner John P. Burke today warned investors about the increasing sophistication of some dishonest investment advisers who steal money from unsuspecting investors.

"Investment advisers and financial planners perform a valuable service in helping individuals and families achieve their financial goals," Burke said. "But with the rapid growth in the number of persons and firms holding themselves out as industry practitioners, we are unfortunately seeing a parallel increase in the risk of fraud or abuse by some unscrupulous investment advisers."

According to Burke, in the past decade in Connecticut, the number of registered investment adviser firms increased 213%, to over 1,100 firms, and the number of registered agents increased 418%, to almost 11,000 agents. In the United States, over 22,000 investment advisory firms - entrusted with $10 trillion in customers funds - are registered with the federal Securities and Exchange Commission (SEC).

Regulators estimate dishonest or incompetent financial planners cause clients to lose at least $300 million a year. Burke noted that in the recent past the department had taken action against questionable investment adviser practices, citing a settlement reached with Newington financial planner Stanley P. Kerry, who allegedly used client funds for his personal expenses. Among other things, the department ordered Kerry to pay $10,000 to the victim's estate.

Despite such actions, Burke said, "much more could be done to help the consumer." He cited remarks by SEC chairman Arthur Levitt indicating that SEC auditors only visited federally registered advisers on average once every 44 years. "That's where states play a vital role," explained Burke. As the "local cops on the securities beat," the department's Securities Division visits or examines its in-state investment adviser registrants on a 3 to 4 year cycle to ensure compliance with state regulations.

Congress is now considering legislation which would revamp the present dual regulatory system, to take away the state's authority to license some investment advisers and their agents who do business with residents in Connecticut. "It is particularly troublesome to remove the state's licensing review and a major portion of our regulatory oversight at a time when so many state residents are turning to investment advisers to help meet their retirement, childrens' college education and other financial planning needs," Burke said. He pointed out that there is no federal scheme in place to register investment adviser agents. Furthermore, Burke noted that federal licensing of investment adviser firms does not entail any qualification standards. "We are concerned this may lead to an erosion in investor confidence and protection in Connecticut."

Consumers considering using an investment adviser or financial planner should recognize that "an increasingly common tactic is to lull investors into complacency by first providing a sound financial service, such as tax-preparation or accounting, and then moving in to offer a questionable investment that promises a large and supposedly-safe return," Burke warned. Although the Banking Department attempts to screen investment advisers and their agents through the licensing process, "one of the best preventative measures is investor education," Burke said.

Before employing an investment adviser, the Banking Department urged residents to first call the agency's Securities Division to find out if both the adviser and any product he or she sells is registered. The department also offered the following advice.

  • Find out exactly how a financial planner will be compensated. Ask for a written schedule of fees or other remuneration the planner will directly or indirectly receive. Watch for conflict of interest problems if the only remuneration a financial planner will receive is commission from a third party for selling you a financial product.
  • Check a financial planner's background for any court or administrative actions involving personal bankruptcy, embezzlement, tax problems, professional license revocations or securities law violations.
  • Thoroughly check out a financial planner's experience. How long has the person been a financial planner? Does the person have experience in your areas of interest? Will he or she provide you with references you can contact?
  • Ask a financial planner about his or her credentials and education, including any courses that may have been taken to obtain an industry designation such as Certified Financial Planner (CFP).
  • Connecticut law requires that if a planner is an investment adviser, an advisory contract must be in writing and must disclose what services an adviser will perform for you. Before your financial plan is prepared, be sure the adviser is clearly aware of your financial goals and the risks you are willing to assume.

To help residents select an investment adviser they can entrust with their financial planning and who is qualified to meet their needs, the Department of Banking has prepared a booklet on Choosing A Financial Planner. Persons may call the Department's Securities Division at (860) 240-8230 or toll-free at 1-800-831-7225 to request a free printed copy or they may write to: Connecticut Department of Banking, Securities and Business Investments Division, 260 Constitution Plaza, Hartford, CT 06103-1800.