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Occasionally, a financial advisor grabs national attention by swindling clients out of millions, evading arrest via a bizarre escape plan or, sometimes, both.
Luckily, there are ways investors can guard against high-profile cons or more under-the-radar criminality, according to financial experts.
“These guys are very convincing in a very complicated area: investments,” said Andrew Stoltmann, a Chicago-based attorney who represents consumers in fraud cases. “It’s part of the reason we have investment fraud every single year.”
Take Matthew Piercey, for example. He is the most recent headline-grabbing example of a broker gone bad.
Piercey, 44, of Palo Cedro, California, allegedly ran a $35 million Ponzi scheme and tried fleeing the FBI last week by using an underwater “sea scooter to hide in the waters of Lake Shasta for nearly 30 minutes.
Bernard Madoff arrives at Manhattan Federal court on March 12, 2009 in New York City.
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Some have gone so far as trying to fake their own death. About a decade ago, Marcus Schrenker, an Indiana advisor and pilot, did so by crashing a plane in Florida, parachuting to safety and speeding away on a motorcycle to avoid prosecution for allegedly stealing $1.5 million from clients.
And, of course, there’s Bernie Madoff, mastermind of the largest Ponzi scheme in history. He is currently serving a 150-year prison sentence after pleading guilty in 2009.
‘Uber red flag’
There are some surefire warning signs for consumers that their money manager has broken bad.
Financial regulators have online databases consumers can reference for background information on specific individuals and firms.
The Securities and Exchange Commission has one, the Investment Adviser Public Disclosure website, for financial advisors. The Financial Industry Regulatory Authority’s resource, BrokerCheck, lists brokers. (A person may appear in both.)
U.S. Securities and Exchange Commission building in Washington, D.C.
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First, check to see that the person appears in either system and that they are licensed or registered with a firm. This means they have met a minimum level of credentials and background to work in the industry, Stoltmann said.
“If they’re not, that’s the uber red flag,” Stoltmann said. “If not, it could be some guy cold-calling from his mom’s basement.”
It also makes sense to Google the advisor or broker’s name to see if any news articles about past indiscretions or lawsuits appear.
The regulatory databases will also list any disclosures, complaints, arbitrations or settlements involving the individual.
“It’s the cockroach theory: If you have one or two complaints, there are likely dozens of other times the advisor has engaged in chicanery but hasn’t gotten caught,” Stoltmann said.
Check for nefarious financial behavior like sales abuse practices, unsuitable recommendations, and excessive or unauthorized trading, according to Barbara Roper, director of investor protection at the Consumer Federation of America, an advocacy group.
“There are plenty of people out there who don’t have a problem,” she said. “So why not be safe and avoid those who do?”
‘Always a first victim’
However, just because these red flags aren’t initially present doesn’t mean consumers should let their guard down.
“The problem is, there’s always a first victim, for whom none of these indicators or history of abusive conduct exists,” Roper said.
In other words, don’t get complacent. There are other signals to watch for after deciding to trust an advisor with your money.
At some point you start asking questions.
adjunct professor at the Fordham University School of Law
One of the lessons from Madoff’s multibillion-dollar fraud was ensuring your money is being custodied (i.e., held) at a reputable, third-party custodial firm like Fidelity or Charles Schwab, Stoltmann said.
That makes it much harder for an advisor to steal money or take advantage of a client, since the assets aren’t held in-house and clients aren’t making checks out to the advisory firm, he said.
Think of this as a firewall like two-factor authentication — the custodial firm has certain procedures for withdrawing money, which often involve contact with the client, Stoltmann said.
Customers can check their regular account statements for this information.
Hyper trading activity
Losing money isn’t necessarily a red flag, in and of itself, especially if it occurs in a down market.
But it might be a bad sign if an investor’s portfolio is tracking well below customary stock and bond benchmarks, according to George Friedman, an adjunct professor at the Fordham University School of Law and a former FINRA official.
“At some point you start asking questions,” he said.
Hyper trading activity, as outlined in an investor statement, is another telltale sign. Such account churning generates fees and commissions for advisors but financially harms the client.
Proprietary investments — for example, owning a mutual fund run by your brokerage firm — aren’t necessarily a fraud signal, but may be a sign that an advisor or firm is making money at your expense, Friedman said.
“I’d review account statements every month,” he said. “If you see something funny or unusual, that’s a flag.”
Of course, investor statements could be doctored to hide such information.
Unsatisfactory or delayed responses to client questions should prompt clients to escalate their case to the firm’s compliance department.
Being asked to communicate outside of an advisory firm’s official channels, like company e-mail, is also a major red flag, Roper said.
And, importantly, understand your investments and only place your money with reputable money managers, she said.
“If you can’t understand it, it’s a bad sign,” Roper said. “If the [investment] prospectus seems designed to confuse rather than clarify, it’s a bad sign.”
“People want to believe there’s some great investment opportunity out there they’ve just lucked into,” she added. “It’s as old as time, the persuasive con artist who can talk someone into buying the cure-all elixir.”