There has been a lot in the press recently about various investment frauds that have been perpetrated, the Madoff one being the most notable. It’s an important question, how do I know that my money is safe? Here are a few things to watch out for.
- Does the person doing your investments also provide the statements?
It is very difficult to commit fraud if you don’t control the statements. Someone can claim whatever they want, but if the statement showing the truth comes from an independent 3rd party, there is really no way to pull off a fraud. But if they provide the statements, they can manipulate the numbers to show whatever they want. I’m not talking about a major mutual fund or brokerage. I’m referring to an investment advisor, hedge fund manager or independent broker. If they provide some kind of consolidated statement mailed from their office, triple check it. Find out how you can get an independent 3rd party to verify what they say is 100% accurate. If they hem and haw at all, don’t get involved. - Do they have unlimited access to your funds?
Many advisors have limited access to the funds in an account to deduct their fees. These are limited by law to a few percent a year. But if anyone asks for an unlimited power of attorney, look out. They would have carte blanche to do whatever they want with your money. There are very few situations where this is necessary. - Do they earn commissions on your trades and have the ability to trade all they want?
Someone having the ability to decide what to buy for you account is fine, as long as they don’t earn commissions on trades. Or earning commissions is fine as long as they get each trade approved first. But the combination of earning commissions and the ability to make unlimited trades can be too big a temptation for some brokers. Don’t allow for this combination unless it is truly necessary.
For the record, my company earns no commissions on trades, never produces client account statements (they come from the asset custodian) or takes control of any client assets. This is nothing unique to my company, it’s how most ethical investment advisors do business.
During a period such as this, the ups and downs of the market are upsetting enough without worrying whether someone is trying to cheat you. Don’t be afraid to ask questions about how your securities are kept safe, and if you don’t like the answers, move on.