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Friendly Advice Can Cost Dearly

Investing: Slatkin case shows that relying on friends or relatives when choosing a financial advisor is risky business.


Asking friends for help can be a good way to start a search for a financial advisor, experts say. But relying blindly on such referrals can be a recipe for disaster, as the current saga of Santa Barbara money manager Reed E. Slatkin demonstrates.

To cite but one example: A retired Tarzana businessman said he handed over $6 million to Slatkin based on a friend's recommendation and a single meeting.

"I just figured [the friend] is a brighter fella than I am, and he had money with Reed," said the retiree, who recently had sold a successful construction-related business and who asked not to be named. "That's kind of a dumb reason, isn't it?"

Hundreds of other investors made similar decisions, much to their regret. Government investigators and investors' attorneys now believe as many as 800 individuals, families and companies invested with Slatkin, who is under criminal investigation for alleged investment fraud.

Many of the investors were multimillionaires who met Slatkin through their equally rich friends--proving that the wealthy can be just as capable of being duped as those with less money at stake, experts said.

It's not that asking for referrals is wrong, regulators and financial advisors say. Investors typically are advised to seek recommendations when looking for someone to manage their money, and asking friends for help is a common practice. One-third of the respondents in a 1999 survey said they relied on a recommendation from a friend or relative in choosing a financial advisor.

But gathering business cards at a neighborhood party or picking up names through the grapevine at work can be problematic if that's the end of the selection process, attorneys and regulators say.

"We tell people to get referrals, but how good are the referrals?" asked Charles Rettig, a Beverly Hills attorney representing several of Slatkin's investors. "Not very," if the person making the recommendation hasn't checked out an advisor's background.

Investors should interview multiple candidates, check advisors' backgrounds with regulators and scrutinize investment statements before handing over their money, said Susan Wyderko, director of investor education for the Securities and Exchange Commission.

"We harp ad nauseam about what you should do, but not many people do it," Wyderko said.

Being rich doesn't necessarily make investors more cautious. The wealthy may be even less inclined to do the legwork required to hire a qualified money manager than those with smaller amounts to invest, some experts said.

"It's too much effort. These people have very busy lives, and they want what will simplify their lives," said Victoria Collins, a Newport Beach financial planner who specializes in wealthy clients. "That can mean relying on friends rather than doing the due diligence yourself."

Fear and ignorance also can be roadblocks for the very rich, as they are for the less affluent, said Thayer Willis, a Portland, Ore., therapist to the wealthy who herself is an heir to the Georgia-Pacific lumber fortune.

"A lot of people who have wealth are not very educated financially," Willis said. "They've gotten along trusting people and nothing bad has happened, and they think it's too complicated for them to pay attention to" financial matters.

Those who inherit money often are used to having others handle the financial details of their lives, and those who made money as entrepreneurs may not see the need for such effort, Willis and Collins said.

"Looking for shortcuts to get to the end result is very much the entrepreneurial approach," Collins said.

Investors also can depend too heavily on their own ability to detect dishonesty, Wyderko said. Those who have been successful in other businesses--such as doctors, entrepreneurs or venture capitalists--may be particularly likely to overestimate their judgment or that of their friends, she said.

"They think they're too smart to be outsmarted," Wyderko said.

Many investment frauds depend on that dangerous combination of overconfidence and ignorance. So-called affinity scams depend on an inclination to trust friends or members of the same ethnic, social, professional or religious group, said James Walsh, an insurance fraud expert and author of a book about scams called "You Can't Cheat an Honest Man."

A con artist wins the trust of key members of the group, who then recommend him to their friends and associates, Walsh said.

In one such scam locally, a Palmdale woman and two accomplices bilked more than 70 Filipino immigrants out of $1.4 million in a High Desert land fraud. In another, rural Midwestern church members were promised guaranteed returns from "prime bank" investments that did not exist. More than 100 people lost $7.4 million, according to the SEC.

In other frauds, the affinity ties are looser, but investors are brought in by glowing recommendations from their friends.

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