|How to protect yourself against adviser fraud
|By Mark Terry
Trust is a fundamental aspect of the financial adviser-client relationship. You are, after all, trusting the adviser with your money. But what can you do to protect yourself from potential fraud? And if something goes wrong, what should you do about it?
Before cementing a relationship, you should ask a prospective adviser for references, preferably more than one.
You can also conduct your own due diligence by checking
into a potential adviser's background. Check his or her ADV
form. All registered investment advisers must file one of these
with the Securities and Exchange Commission, or SEC. It provides
information about the types of assets they manage, their fee arrangements
and other information related to their business. Any disciplinary
actions will also be noted on this form.
You can also check the SEC's Central
Registration Depository. It lists any disciplinary actions taken
against brokers and advisers, as well as the firms for which they
work. Another good source is the North
American Securities Administrators Association, an organization
comprising consumer groups, state securities regulators and investment
providers dedicated to investor protections. The NASAA recently
published a guide about investment professionals called "Cutting
through the confusion" that's worth reviewing.
The National Association of Securities Dealers, or
is a self-regulatory organization that governs stock brokers and
securities professionals. On the NASD site you can conduct a background
check on brokers.
The Certified Financial Planner Board of Standards
conducts investigations of complaints filed against Certified Financial
Planners and lists any disciplinary actions taken on its Web
If something should happen and you believe your adviser is stealing
from you, file complaints with any of the above-mentioned organizations.
Otherwise, you have two options: One is to contact your state's
attorney general to determine what legal recourse is available to
you. Two, if the matter is serious, contact an attorney.
"Find out what your rights are and consider the
possibility of filing a complaint to recover damages for fraud,
if there was, in fact, fraud," says Joshua Barron, J.D., with
JMB Financial Services Group in Troy, Mich.
Barron does offer a cautionary word, though: There's
a big difference between fraud and not being happy with your investment
outcomes. "If you lost money and it's egregious and it's out
of line for what is suitable for you, that's important. If you told
your adviser you're really conservative and not comfortable with
risk and they invested your money in commodities or they're day
trading on your account and lost 40 percent of your money, that's
a problem. They have a responsibility to you and their investment
strategy wasn't suitable for you."
On the other hand, if they invested properly and thoughtfully in a well-diversified way and the market tanked and you lost money, that's not fraud.
"That doesn't necessarily translate to the adviser
having done anything wrong," says Barron. "It's an occupational
hazard. If there's fraud where they've lied or misrepresented, or
they've withheld the truth, that's a much, much more serious side