Gaylen Rust must have seemed trustworthy to the people who gave him money.

Rust was a long-time businessman in Layton, Utah, where he ran a parts store created by his father in 1966. He also founded a charity, Legacy Music Alliance, which funded arts programs in the United States. schools. An admiring 2013 portrait in the Salt Lake Tribune, titled Rust, is "the largest promoter of arts education in the state."

Federal and state regulators, however, say that Rust was running a Ponzi scheme. Civil lawsuits filed late last year by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Utah Securities Division have said that Rust, his wife and l '. one of his five children had persuaded hundreds of friends, clients and business partners across the country to invest more than $ 200 million in a fake money exchange pool.

When scammers target groups of people who know each other or have something else in common, such as religion, it is called affinity fraud. And that's one of the main reasons why you should not rely solely on the recommendations of friends and family when choosing a financial advisor.

"Word of mouth recommendations are even more important to crooks than to legitimate counselors," says Barbara Roper, director of investor protection for the Consumer Federation of America. "Where else will they find their victims?"

Asking friends and family for referrals is not a bad way to start looking for a counselor, says Roper. Do not assume that your loved ones have done due diligence.

People who have invested with Rust have ignored several big red flags. Depending on the shares deposited:

-He was not registered in the securities industry.

-He said consistently high yields, stating that he had an average of 20 to 25% per year and never less than 12%.

-He did not use a third party, such as a brokerage firm, to prepare statements of account, but rather provided investors with spreadsheets illustrating the alleged transactions.

Promises of high returns with little or no risk are a classic sign of fraud, as are returns generated without supervision by a third party, says Roper.

Counselors who are not real crooks may still have a checkered history. One research team found that one out of 14 advisors registered with the Financial Regulator, a private self-regulatory organization, had a history of serious misconduct, such as fraud, forgery or unauthorized trading. Thirty percent of this group had committed several offenses, said Mark Egan, a professor at Harvard Business School and co-author of the study.

"Counselors who have had reprehensible conduct in the past are five times more likely to engage in reprehensible conduct in the future," Egan said.

Even advisors who do not like the regulators can be bad news if they do not put their clients in the forefront or if they are simply incompetent. To protect yourself, Roper recommends that financial advisors take the following steps:

CHECK THAT THE ADVISOR IS WELL REGISTERED. Financial advisors should be registered as a broker or investment advisor, says Roper. You can start with BrokerCheck, the free online tool of FINRA. If the person you are consulting is an investment advisor rather than a broker, the tool will send you to the investment advisor's disclosure database. Anyway, you should see their employment history and discipline.

TAKE SERIOUSLY ANY DISCIPLINARY HISTORY. Sometimes minor complaints can be found in the databases, but reported misconduct is usually serious, says Egan. At the very least, it's worth talking to the advisor about what you'll find if you're already a customer. If you have not hired this person, keep looking because most counselors never make fun of regulators.

Find and verify the correct credentials. People who offer cash advice must have at least a title that means rigorous financial education and adherence to a code of ethics, such as a Certified Financial Planner or a Chartered Financial Analyst (CFA), Roper said. CPA's who are personal finance specialists meet requirements similar to those of a CFP. You can check the references of an advisor on the sites of the organizations that have awarded him – the Board of Standards of the CFP, the CFA Institute and the American Institute of Certified Public Accountants, respectively.

You can check all the unknown identification information on the FINRA website to see how much effort and education is needed to get them, suggests Roper.

"The mere fact that an individual has a chain of letters after his name," she says, "does not mean that they represent a valuable area of ​​expertise."


This section was provided to The Associated Press by the NerdWallet Personal Finance website.

Liz Weston is a columnist for NerdWallet, Certified Financial Planner and author of "Your Credit Score". Email: Twitter: @lizweston.


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