As professionals, each with over thirty years in the financial services industry, it is disheartening to periodically hear of embezzlement, fraud or some other criminal activity that destroys the wealth of an individual or a business and the reputation of this industry. That said, like any industry, there are those that scheme to take advantage of the unwary and sometimes find at least temporary success. Keep in mind that the vast majority of men and women practicing in this industry are honest, trustworthy, hardworking individuals. However, as the old saying goes, it takes just one bad apple to ruin the whole barrel. However, given the periodic occurrences of malfeasance, we thought it timely to write this article, hoping to identify some steps the reader might take to prevent bad things from happening to their portfolios.
Step Number One – your monthly statement (or quarterly, if applicable) as well as tax information should come directly from the custodian and not from the advisor. Some examples of custodians are Charles Schwab & Company, Wells Fargo, JP Morgan Chase and Merrill Lynch. If you are receiving this information ONLY from the advisor, this is a red flag.
Step Number Two – the custodian should be different from the broker. Make certain they are not one and the same. As an example Bernard L. Madoff and Bernard L. Madoff Investment Securities were one and the same. Once again, a red flag.
Step Number Three – Generally speaking, invest only in easy to liquidate, transparent, marketable and publicly traded securities. As a general rule, do not invest in private placements or securities whose price you cannot look up online to determine the market value. Do not invest in penny stocks unless you are speculating (like going to Las Vegas). This is not the path to wealth, but to financial ruin.
Step Number Four – Periodically check your account online on a website that is provided by and maintained by the custodian, not the advisor. Once again, this provides a firewall that protects your assets. The value will most likely rise and fall with the markets. However, at least you know what is stated on the website as your value is the actual value. Similarly, investments do rise and fall in value. Be wary of those whose value remains static.
Step Number Five – Always make checks payable to the custodian. Never make a check payable to the advisor. Enough said.
Step Number Six – Check for discrepancies. The statement from the custodian should reconcile with that from the advisor. Errors could be genuine or perhaps something less than genuine.
Step Number Six – Be careful of pushy salespeople or those promising high investment returns. We agree with a paragraph in a pamphlet prepared for FINRA (Financial Industry Regulatory Authority, Inc.) by Lightbulb Press that notes “if you’re trying to get rich quick, there’s probably someone out there who’d be happy to sell you a scheme that sounds like the answer to your dreams. Making a killing on a ‘hot’ investment is not key to a successful strategy.”
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial
advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.