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Investing By Faith And Not By Sight

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
August 31, 2004

IN THIS ISSUE:

1.  Legitimate Faith-Based Investing

2.  Faith-Based Financial Planning

3.  Fraudulent Faith-Based Scams

4.  How To Avoid Affinity Fraud

Introduction

As you might expect, I get tons of financial publications that discuss the many topics related to investments and investing.  In a recent issue of a magazine directed toward Investment Advisors, I read an article about how more and more investors are using “faith-based” investment vehicles and advisors.

“Socially responsible” investing has been popular for a long time, but it’s important to note that this is not the same as faith-based investments.  Socially responsible investments seek to invest only in companies that meet certain social standards, such as being environmentally friendly or not using animals for testing, etc.  Faith-based investments are different in that they seek to mirror the beliefs and values of their investors, whether they be Christian, Moslem, Jewish, Buddhist, etc.  These investments seek a profit like any other investment, but do so in such a way that avoids stocks of companies that violate a particular set of values.

As such, these investments fall under the general heading of “affinity” investments, in that they target investors who share a common religion, nationality, or background.  If you attended college or are a member of an organization, I’m sure you have been offered affinity-based credit cards through the mail.  Affinity-based investments are like that except they offer an investment that restricts its holdings based on established guidelines that fit the particular group to which it is aimed.

While most of us are comfortable dealing with others who share our values and beliefs, the area of affinity-based investments is, unfortunately, also ripe for fraud.  In fact, securities regulators consistently list affinity fraud among the top ten investment scams.  Therefore, it is important that religious minded investors educate themselves so as not to be taken in by potential scams.

From the responses I get on my E-Letters, I know that many of my readers have strong religious ties, and so you may be interested in affinity-based investments.  In this week’s E-Letter, I’ll discuss some of the legitimate choices out there, as well as provide information on how to identify and avoid affinity frauds.

Moral Investments

The recent growth in religious affinity investments has come as a result of some investors insisting that their investments mirror their spiritual beliefs.  However, this desire is nothing new, as there have been morality-based mutual funds since the early 1970s.  Many of these funds are associated with church denominations or religious organizations that originally offered these values-oriented funds to their membership, and then branched out to the public in general.

Many religious investors do not want to own stock in businesses that engage in questionable activities. Today, however, with huge corporate conglomerates, it is sometimes difficult for individual investors to know exactly what all of the subsidiaries of a corporation may do.  Thus, it is beneficial to have a faith-based mutual fund with a professional investment manager who has the resources to determine the kinds of activities all of a company’s subsidiaries engage in.  In most cases, these funds screen out companies that profit from abortion services, pornography, immoral lifestyles (including the promotion of such lifestyles in entertainment), alcohol, tobacco and gambling.  Still others will not invest in defense industries or gun manufacturers.

While you may wish to put your money to work only in companies that reflect your particular set of beliefs, it is often easier said than done.  As the presence of various religious denominations attests, there are different interpretations of what is right and wrong.  What may be a violation for one denomination may be just fine for another.  For example, the Baptist Church generally teaches abstinence from all alcoholic beverages, but Catholics have no such teaching.  However, Catholics would not want to invest in a company that makes contraceptives, while many Baptists would have no problem with this.  As a result, a religious investor has to know what screens a fund manager is using to insure it matches his or her values.

You also need to know how far the screens go in excluding companies.  Some funds exclude businesses only if they make or distribute products that violate the investor’s religious beliefs.  However, other funds exclude companies that might otherwise be acceptable based on their product or service, but have offending employee benefits policies such as providing medical benefits to unmarried or same-sex domestic partners.

In addition, some of the companies founded on moral principles are not particularly attractive from an investment point of view.  As a result, fund managers sometimes include companies that have a very minor part of their revenues generated from immoral activities.  I recently read a report from back in 2000 that graded religious funds based on a set of moral criteria.  Violations in these funds ranged from 0% to over 50%, illustrating the difficulty in maintaining the funds’ moral direction while also providing a reasonable return.

Finding Faith-Based Alternatives

Finding faith-based investment alternatives may prove as challenging as deciding which ones best fit your values.  While you can search for socially responsible investments on various Internet websites and software packages, faith-based alternatives are not usually given as a separate category.  Therefore, one way to find these funds is to do a search of socially responsible funds, and then review each alternative’s prospectus.  

There are a number of excellent online resources for those interested in learning more about socially responsible and faith-based investments.  I have listed a few of these websites below:

The Social Investment Forum:  http://www.socialinvest.org/
SocialFunds.Com:  http://www.socialfunds.com/
The Calvert Group:  http://www.calvertgroup.com/sri_kwyo.asp
Financial Seminary:  http://www.financialseminary.org/

In addition to these resources, there are mutual fund families that have been established to serve specific religious groups.  Below, I have listed the names and website addresses of mutual funds that serve various religious affiliations.  Please be aware that I am listing these fund families for information purposes only, and do not endorse any particular fund or fund family:

Catholic:

Aquinas Funds ( http://www.aquinasfunds.com)
Ave Maria ( http://www.avemariafund.com)

Christian Science:

American Trust Allegiance Fund ( http://www.allegiancefund.com)

Conservative
Christian:

Timothy Plan ( http://www.timothyplan.com)
Noah Fund ( http://www.noahfund.com)

Islam:

Amana Funds ( http://www.amanafunds.com)
Dow Jones Islamic Fund ( http://www.investaaa.com)

Lutheran:

Thrivent Funds ( http://www.thrivent.com)

Mennonite:

MMA Praxis Funds ( http://www.mmapraxis.com)

Presbyterian:

New Covenant Funds ( http://www.newcovenantfunds.com)

Seventh Day
Adventist:

Capstone SERV Funds ( http://www.servfunds.com)


As you research funds, you should be careful to not put money into any fund just because it purports to incorporate your religious beliefs.  Once fund alternatives have been identified, you should review each alternative just as you would any other investment, and compare it to applicable benchmarks such as the S&P 500 or Russell 2000 indices.  You should also look at the tenure and experience of the money manager.  Since faith-based funds are a “niche” market, they sometimes have trouble attracting the best and brightest managers.

It has been said that investing with your conscience will result in lower returns.  However, the Domini 400 Social Index (a stock index made up of companies screened for a variety of social concerns) has outperformed the S&P 500 since it’s inception in May of 1990.  However, this index is not limited to only those companies that would be acceptable to faith-based investors.

To get an idea of the performance of strictly faith-based funds, I ran a sample of the more popular funds through our mutual fund analysis software.  Out of a sampling of 42 funds with at least a five-year track record, only twelve (28.5%) performed in the top half of their respective Morningstar categories as of July 31, 2004.  A possible reason for this poor relative performance – in addition to the limitations on what they can invest in - is these funds tend to be smaller in size, so the expense ratios are typically larger than for mainstream mutual funds. 

Even so, there were some faith-based funds with performance in the top 25% of their respective Morningstar categories, so it shows that it is possible to get a reasonable return while also investing according to your conscience.   However, with so few funds with good performance, it may be difficult to find enough viable funds to adequately diversify your portfolio.  Also remember that past performance is not necessarily indicative of future results.

Faith-Based Financial Planners

In addition to faith-based investment products, more and more financial planners are starting to hold themselves out as faith-based planners.  They seek to provide financial guidance that is based on the Bible, the Koran, etc., depending upon the affinity group they wish to serve.   Obviously, the largest religious affinity group in the US is made up of Christians, so most faith-based financial planners seek to provide Christian-based investment counseling.

These financial planners are providing religious-based financial counseling as a result of a perceived demand from their clients for spiritually based investment advice.  According to the National Association of Christian Financial Consultants (NACFC), the mission of their membership is to integrate Bible-based principles within their financial consulting practices.   In other words, their practices are generally viewed as much a ministry as a profession.  You can find out more about the NACFC on its website at www.nacfc.org.

Religious-based financial counseling can be a good thing, especially if the addition of a spiritual side to your finances helps you to develop the discipline to save and invest the way you should.  However, faith-based planning is no guarantee that the advice you get will be the best available.   From my own personal observations, I have not found all Christian-based businesses to be superior to their secular peers, and I expect financial planners will be no exception.  And in fact, I have found certain groups, especially in the investment world, that use their supposedly religious orientation to lure investors into trusting them, when many times they should not.

Therefore, you need to evaluate financial advisors the same way I recommended that you evaluate faith-based mutual funds – that is, based on their credentials and performance, and not solely on the fact that they have a sign of the fish on their door. 

Honesty, integrity, and caring for your fellow man are some of the most important precepts of the Bible.  However, these moral values must be mixed with knowledge and experience (call it wisdom) for a financial planner to be effective.

You should never do business with any financial advisor based solely on the fact that they profess to base their advice on religious principles.  Many unwary investors have done so, and have lost everything.

Faith-Based Affinity Fraud

Unfortunately, financial scams involving religious affiliation are nothing new.  There is the story in the Bible about Jesus driving the moneychangers from the Temple during his ministry because they had made it a “den of thieves.”  There are numerous other references to financial deceit in the Bible and other religious works.

While I have no problem with fellow Christians seeking to spread their values to clients, I am wary of the implications of financial advice that is deemed to “come from God.”  I have heard from far too many people who told me they were ripped off by investment promoters that touted themselves as being Christians.  The fact is, securities regulators consistently list religiously based investment scams as among the most prevalent.

You see, people tend to do business with people they trust.  Building trust is one of the basic requirements for having a successful financial planning practice.  However sometimes, untrustworthy people advertise themselves as Christians in order to shortcut the trust issue.  Clients come to him or her not because of the trust they have in the advisor, but because of their common trust in God.

This ability to have immediate trust and credibility based on a common affinity is why scam artists flock to religious themes so often.  Below are just a few examples of actual affinity scams where people have lost money – sometimes their entire life savings:

*  125 members of rural Christian churches in Kansas, Nebraska and Missouri were the victims of a ponzi scheme that raised $7.4 million before the SEC stepped in.  The SEC said that the defendants gained investors’ trust by claiming they were “born again” and that the investment was a duty or prophecy.  Investors were promised that the “prime bank instruments” (a popular investment scam) would pay them 20% per month for up to 18 months.  Based on the latest report from the court-appointed receiver, only about $900,000 of the $7.4 million has been recovered.
*  A lay minister in a Scottsdale, Arizona church pled guilty to operating a ponzi scheme and bilking fellow parishioners of over $11 million.  Supposedly, the money was to be used to fund the construction of a new $2 million church building.  The promoter even enlisted the Pastor of the church to write a pamphlet supporting the investment.  The victims included a recent widow who placed all of her husband’s life insurance proceeds in the bogus investment.
*  A widow was victimized in Florida when she placed $764,000 into bogus promissory notes through a fellow member and former missionary in her church that she had known for many years.  The promoter assured her that her investment would be safe and that she would receive a high interest rate.  In the end, she (and many others) lost everything and was forced to sell her home and declare bankruptcy.
*  In Tampa, Florida, the founder of the Greater Ministries International Church, his wife and three others were found guilty of fraud and other charges in a $448 million financial scam targeting church members.  They used Bible verses to persuade thousands of people to invest in the belief that God would double their money.  The founder is now serving a 27-year prison sentence.
*  The Illinois Securities Department investigated an oil and gas investment scheme in which the promoter targeted Christians by claiming he had built a device to find oil based on visions he had received from God.  About 150 investors are believed to have lost more than $1 million.

And the list goes on and on.  New York securities regulators say they receive a constant stream of complaints from surprised and perplexed victims.   Most disturbing is the fact that many of these complaints are about fellow church members who the victims have known for years.

Ways to Avoid Affinity Fraud

As I stated above, crooked promoters like to utilize religious beliefs to shortcut the normal trust-building process.  However, religion is not the only affinity relationship used.  Other scam artists have targeted members of certain ethnic groups, various nationalities, the elderly, or just about any other group of people who have something in common.  Therefore, it is important that you know how to protect yourself from these wolves in sheep’s clothing.

According to securities regulators, there are a number of steps you can take to protect yourself from affinity fraud.  Among these are:

1.    Check everything out – no matter how trustworthy the person seems, how much scripture they can quote, or how long you have known them.  Never make an investment solely upon the recommendation of a member of your church or other group, especially if the person implies that God has somehow endorsed it.  Be especially cautious if the person offering you the investment appears to be offended by your checking them out.  “Don’t you trust me?” should be a huge red flag.

2.    Ask the promoter if he or she is licensed to sell securities in your state.  If so, contact your state securities regulators (look in the government pages in your phone book) to see if there are any disciplinary actions on record.  If not, or if they say that the investment does not require registration, check with your state securities regulators to see if this fits the description of an investment scam.

3.    If it sounds too good to be true, it probably is.  Don’t fall for investments that promise huge profits or guaranteed returns.  Also, be wary of investments that are promised to have “no risk,” since very few investments are risk-free.   Promises of high profits with little or no risk are classic warning signs of fraud.

4.    Ask for written material explaining the investment and the risks involved.  In many cases, promoters of fraud avoid putting anything in writing, but legitimate investments are usually offered in writing.  Also be cautious if the promoter claims the opportunity is based on “inside information,” or if you are told to keep the investment opportunity confidential, even from your spouse and grown children.

5.    Be wary of any investment that requires you to make a decision too quickly, or if the person offering it to you just won’t take “no” for an answer.  High pressure is another classic sign of a fraudulent investment.  Also, investigate any offer that is promised to be a “once in a lifetime” opportunity.  This may be unfortunately true, in that after you lose your life savings, you may not have any money left to invest in anything else for the rest of your life.

6.    Be sure to take all of the above steps even if you have a friend or relative who made money in the investment opportunity.  Scam artists often pay out high returns to early investors in order to have a source of “testimonials.”  What greater endorsement could a promoter have than a Pastor or Deacon who attest that the investment worked for them?

7.    When in doubt have a trusted third party, such as your CPA, financial planner, or lawyer, review the investment for you.  In addition, you can access information about investment scams on the Internet by going to the following websites:

North American Securities Administrators Association (NASAA):  www.nasaa.org
Securities and Exchange Commission www.sec.gov
Scambusters:   www.scambusters.org

Conclusions

All of us have a spiritual side to our nature, whether we want to admit it or not.  For many years, however, it was difficult to structure investments to coincide with one’s beliefs and values.  For those who did not want to invest in stocks or mutual funds for fear of including a company that supported immoral activities, government bonds and bank CDs were about the only answer.  However, even with the bank CD, you may never know whether the bank is lending money to businesses that engage in the same questionable activities.

Today we are fortunate in that there are investment products that allow investors to put their money where their hearts are.  There are also a growing number of financial advisors who will provide values-based financial counsel that coincide with your particular values and beliefs.

However, because religious affiliation is such a fertile field for scam artists, you need to be especially careful when dealing with anyone who contacts you from your church, mosque, synagogue or other religious affiliation regarding a sure-fire investment opportunity.

You should also never confuse religious faith with faith in a particular investment.  Just because an investment is based on spiritual principles, or is recommended by a religious-based financial advisor, is no guarantee that it will do any better than any other investment.  As I mentioned in this article, two-thirds of faith-based mutual funds rank in the bottom half based on performance.

Finally, do not trust someone – especially someone touting investments – just because he or she claims to be a Christian or a believer in whatever your faith may be.  One of the most unscrupulous and unethical people I have ever dealt with was a man who claimed to be a devout Christian.

Very best regards,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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