Determining whom to trust with your money isn’t as easy as it once was. As Bernie Madoff proved, some of the most successful crooks have the right diplomas on the wall, the right credentials and plenty of references. If heeded, these tips can help you protect yourself and your assets from fraudulent financial advisers.
Use an independent custodian
Giving funds directly to an adviser is an invitation to fraud. Instead, ensure that an independent, reputable custodian, such as Schwab, Vanguard or Fidelity, holds your money. Doing so adds transparency and additional oversight.
Your adviser will still have the power to conduct trades on your behalf — but because a neutral third party holds your money, it ensures the adviser isn’t claiming to execute trades while actually just taking cash out. Also, be sure you have full access to the custodian account online and via phone (through the client service desk).
“Never make out a check to your adviser,” says Laurie L. Klein of Harvest Capital Advisors in Bellevue, Wash.
Beware unrealistic returns
Like the old saying goes: If it sounds too good to be true, it probably is. The market, historically, has increased about 10 percent per year. If your adviser is promising more than that — especially these days — it should send up a red flag and a blast of bugles.
“We have to take lessons from history, says Bonnie Kirchner, author of “Who Can You Trust with Your Money?”
“I think now if I were investing with somebody and they were really bucking the trend, I would do some investigation and see how they were outperforming the market.”
Do it yourself
No method is perfect, but the best defense against fraud is to ensure that your adviser has no access whatsoever to your money. The easiest way to do that is to use your adviser’s advice, but implement the trades yourself. Check your adviser’s references carefully to minimize your chances of getting bad advice. But at least you’ll be protected from Ponzi schemes like Madoff used.
Odds are you have a few people helping you out as you plan your financial roadmap. Use them to monitor each other. It’s a lot more difficult for a fraudulent financial adviser to rip off clients when other professionals are examining his or her advice and actions.
“No investment adviser should make decisions in isolation of your other advisers,” says attorney Martin M. Shenkman, a Paramus, N.J., attorney who specializes in financial and asset protection needs of high net-worth individuals. “If someone is uncomfortable or unwilling to work in coordination with your CPA, estate planner, general attorney, insurance consultant, etc., then there is an issue. … Often the reluctance is due to the fact that the adviser doesn’t understand the real (tax or legal) implications, or is just hustling the client.”
You should be getting regular statements from both the custodian of your money and your financial adviser. Examine both carefully and be on the lookout for any discrepancies. And if you’re not getting statements from your custodian, find out why — and fast.
“Blindly handing over your life savings and walking away is asking for trouble,” says Cheryl J. Sherrard, Director of Financial Planning, Rinehart Wealth Management in Charlotte, N.C. “If the only documentation you receive about a particular investment is from your adviser, and there seems to be no other way to verify what is occurring, you should be concerned.”