After a couple of stock market crashes and a financial meltdown, you should have figured out by now that protecting your money should come before trying to make a big gain.
Protecting Your Money Can Be Simple
As I write this (2.4.09), I am listening to Harry Markopolos, the “whistle blower” who outed Bernie Madoff, teaching Congress on how they can help with protecting your assets:
He made two very interesting points that I agree would dramatically cut down on financial fraud:
The first point was that there are entirely too many GREEN LAWYERS working at the SEC trying to find financial fraud. He recommends seasoned Wall Street FINANCIAL Executives who already made their money and want to serve the public. If top line former Wall Street executives and front line investigators were on the job, people with extensive FINANCIAL AND ACCOUNTING EXPERIENCE, and with financial incentive to find fraud, they would NOT be intimidated by a well-respected, and feared Wall Street crook such as Madoff.
I imagine it must be difficult for a 27 year old recent law school grad to bring a complaint against a guy like Madoff. If instead it were a successful former executive, with graying hair or “no hair” (Markopolos pointed this out!), who wasn’t intimidated by Madoff, we would probably have stronger investigations. Markopolos repeatedly stressed the lack of financial experience and knowledge of the staff of the SEC during his Senate testimony.
Who Has “Custody” of Your Assets?
The second point that could have helped avoid some of these problems, go a long way to protecting your money, and something that applied to Madoff particularly, was that he was his own CUSTODIAN. In many firms, including how I do business, the advisor does NOT have custody of the underlying assets. I can buy and sell for clients but can not cash out or remove any holdings from a client’s account.
Madoff was his own custodian, according to Markopolos, which means he could manipulate the actual assets. Many large financial firms use State Street or Mellon/Bank of NY/Pershing to do their custody work. Some companies such as Fidelity, Schwab and Td Ameritrade have their own clearing/custody operations. In these cases, the assets are separate from the money manager and with Madoff, apparently they weren’t.
In a few local examples of financial fraud, it was reported that the clients made checks out directly to the advisor! Anecdotally, I lost out on a referral to a client to an advisor who ended up stealing over $20M from clients! This advisor, reportedly, set up limited partnerships which he could use to funnel money to support his personal desires.
What can you do to prevent this?
1. make sure that if you use an advisor, that there is an independent custodian/clearing firm.
2. If you use a private money manager who does have his own limited partnership fund or hedge fund (such as how Warren Buffet started – all these guys aren’t bad you know!), insist on seeing who the INDEPENDENT AUDITOR is. You want a fund that is audited annually by a reputable auditing firm – likely it will be a regional firm for a smaller fund. You could certainly contact that auditor to make sure everything is real!
3. If you are very worried, use a bank custodian. I have researched a few and one that I do like is Pensco Trust. Being a bank custodian adds another layer to oversight (FDIC, OTS) on top of the existing securities regulators.
If you have other questions, feel free to share for the benefit of readers. Of course I make no recommendations and offer no advice with this article. This material is for your information only. If you want advice, seek an independent tax/financial advisor.
[Note: screening our full service clients’ money managers for accuracy and fraud prevention is one of our 106 checklist points in 10 Deliverables provided to our clients annually. We take this issue very seriously.]
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Christopher Grande, MSIM, RMA®
Christopher Grande, MSIM, RMA is principal at Walnut Hill Advisors, LLC. Find out more about working with Chris atwww.PlanWithChris.com. If you’d like to schedule a virtual meeting with Chris, hit this link: Schedule with Chris.
Thanks for reading! And Read my site’s disclaimer about online content please – this is an educational article and not meant necessarily to be advice directly to you. I don’t know you (yet). Consider consulting a knowledgeable advisor before trying this at home ok?