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How to protect yourself against adviser fraud

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?

Preventive measures
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 NASD, 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 site.

Fighting back
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 of things."

Bankrate.com's corrections policy
-- Posted: Sept. 21, 2006
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