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If someone is on your site, I know they have all of the proper certifications, et. Does that mean someone like Bernie Madoff could be there and look ok? Did he have the same certs or not? If so, how can I be sure I am not picking another Madoff?

Feb 15, 2012 by Tom from Palo Alto, CA in  |  Flag
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Jim Blankenship Level 17

Tom,

Technically, yes, an advisor like Bernie Madoff could be on this site. One of the biggest issues that investors with Madoff faced was due to the fact that there were no third parties involved in the process. By this I mean that Madoff handled all of the investments within his firm - not via an outside custodian, for example.

One way to guard against being caught in such a trap would be to ensure that your advisor works through a third party (a separate entity from the advisory) - in order to ensure that at least two sets of eyes are looking at your accounts and the investments in the accounts. Typically you would receive a separate statement from the third party custodian showing your investment account, which would be audited by the third party custodian's internal and external auditors, independent of the advisor.

Although there are bound to be ways yet unknown to still pull off a scam, if there are two independent entities involved in the process the likelihood is lessened greatly.

I probably haven't covered all the bases, but that's my opinion on the matter.

jb

Comment   |  Flag   |  Feb 15, 2012 from New Berlin, IL

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In addition to checking on this website, there are other steps you can take to try to avoid becoming a victim of fraud by an unscrupulous advisor. It's your money and you want to be sure who you're dealing with. 1) Make sure the advisor uses a third-party custodian. That's where your money is. And, you should get statements and other reports directly from the third-party custodian. 2) Make sure the advisor only has limited discretion rather than full discretion. They can only direct investments, not take money out of the account. 3) The advisor should be able to explain clearly and easily how they invest on your behalf. 4) Avoid being wowed by a "celebrity" or enticements such as "this is an exclusive club and if you're lucky we'll let you in." 5) Be wary of high returns with low risk. There's no free lunch. 6) Check out the advisor on this site as well as either the FINRA or SEC website or both.

1 Comment   |  Flag   |  Feb 15, 2012 from San Diego, CA
Mike

The third-party custodian issue is so critical and yet it's rarely talked about in the press. Good points, Paul.

Flag |  Feb 15, 2012 near San Diego, CA

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Jim and Paul have given great advice. In short, know what you have, and know where it is. I would add a specific caution about private funds and other unregistered investment products, which seem to be proliferating as investors search for "safe" investments with "low risk."

Fraud is pervasive in this segment of the financial markets, and most investors would be well-advised to avoid private funds and unregistered products entirely. A red flag should go up if you are shown a private fund and are not an accredited investor, if someone is recommending a substantial allocation of your portfolio to such products, or if the promoter is not registered with FINRA as a broker-dealer. You may miss out on some opportunities, but you will also avoid some landmines.

Comment   |  Flag   |  Feb 15, 2012 from San Francisco, CA

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Tom,

There are actually two sides to your question… how you can avoid picking an unscrupulous advisor, and in the unfortunate event that you do, how you can protect yourself after the fact.

Avoiding a bad apple is easier said than done, but fortunately, most advisors genuinely want to help people, not harm them. There are some simple steps you can take to steer you toward a good one though. First, look for an advisor who has one of the top three credentials (CPA, CFP or CFA). These are the gold standards for advisors in the areas of tax, planning and investments, and in addition to requiring a serious time and education commitment, they require the advisor to adhere to a code of professional conduct. Second, seek out an advisor who can prove they have been in the business for a considerable amount of time. Not only will their experience be of benefit to you, but if an advisor has been around for a while with no complaints filed against them, you can feel comforted that they are operating with higher standards. Third, ask the advisor if they will sign a fiduciary oath, stating that they are operating with your best interests in mind. This puts them on record as being an advisor working for you, first and foremost. Fourth, see if they will provide references. Some advisors will not do this for privacy reasons, but if you can have a conversation with a current client, that can lend some comfort as well.

Even investors’ best efforts to weed out bad advisors don’t always work out though. If you had asked Bernie Madoff to provide references, you would have received them, and based on his longevity in the business, his public reputation and the firm’s facilities, any clients would have spoken well of him and his firm because they too had been bamboozled. The decision which cost Madoff investors billions of dollars though, was allowing his firm to have custody of their assets. So the question of how you protect yourself in the event you do choose a bad advisor has a relatively simple answer. If you choose to work with an advisor affiliated with a broker-dealer firm, make sure the broker-dealer firm is a well-known, highly-respected firm. If you choose an independent advisor with a less-well-known name, make sure you choose one who does not take custody of client assets, and who uses a separate custodian which is a well-known, highly-respected firm.

The combination of these step should give you some level of confidence that the person you are dealing with is legitimate, and that they have your best interests in mind.

Comment   |  Flag   |  Feb 15, 2012 from Cumming, GA

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Jonathan Foster Level 16

Hi Tom,

We are all glad you asked this question! We can all tell you this question comes up with some regularity. Let me give you some material differences between a Madoff-style investment and what you are probably considering.

1) Defrauded investors in Madoff were investors in private accounts WITHOUT an independent custodian like Schwab, Fidelity, Pershing, etc. Madoff produced his own investor statements, and there was no INDEPENDENT 3rd party custodian sending clients a separate statement.
2) Madoff's auditor was a no-name, CPA firm and not a major accounting firm. Though your advisor will probably not provide you with an audited statement, his/her custodian will unquestionably go through an independent custody audit from a reputable firm, assuming the custodian is a major firm.

Here are some ideas to protect yourself.
1) If the advisor provides you with a track record, read the footnotes carefully, and ask questions! If a record seems too good to be true, it probably is. FYI, an advisor without a track record is not necessarily a red flag, as many advisors do not produce composites. 2) Only work with an advisor who uses a major asset custodian. These custodians are liable if you get defrauded, so they tend to be pretty careful. 3) Only do business with an advisor who provides you with independent access to your custodial statements or custodian online access. Your advisor will provide you with regular account statements that he/she produces about your account...make sure to compare this statement with the one provided by the custodian. They should match EXACTLY. 4) Never give your advisor more than "limited power of attorney." This gives them the ability to buy/sell for your account, and to debit your account for their fee. Other than that, they can't move your money without your approval. 5) Check the FINRA and SEC websites for disciplinary information. If you read something you don't like, ask questions. Do a Google search on the advisor and his/her firm. See what comes up.

Jon Foster

Comment   |  Flag   |  Dec 26, 2012 from Santa Monica, CA

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