Custody 2 - For Investors: 10 Simple Steps To Protect Your Money From Fraud

by: John Lohr


We cannot stop the crooks, but we can hinder their ability to get to our assets.

Follow these 10 simple steps and it will be more difficult for anyone to misappropriate your invested assets.

You worked hard to accumulate assets, so after you do the due diligence before you hire an advisor, follow these simple tips to safeguard those assets.

Tens of millions of dollars (and more) of investors' money is misappropriated annually by rogue financial advisors who have access to clients' assets.

In the self-policing world of Wall Street, many, indeed most advisors are not the "rogue" type. They are honest, hard working and believe they are providing value to their clients. However, it is the other element I want to focus on. Some are ego driven (like Bernie); some are unqualified or uneducated and make inadvertent costly assumptions; some are just plain crooks. The problem is they don't wear badges ("Badges, we don't need no…")

When Bernie came down in 2008, some blamed the duped investors who were taken in by him. You know, there's some truth in that. We investors, as a group are often uninformed, not financially savvy and maybe want to believe that someone will help us in our investment strategizing. Our problem is that we do not do sufficient due diligence and inspection of our potential advisors. (See my earlier series here on SA: "How to Choose an Advisor," Parts I, II, III).

We can not expect to be able to stop the crooks, but there are some simple steps we can take that will provide some safeguards around our money, to make it harder to misappropriate.

1. If you have money with an advisor, you have to have a qualified custodian like a bank, big brokerage firm, financial custodian clearing firms, and the like. Find out who that is. Ask. Get a custody brochure from your advisor. All custodians have them. Ask to look at the paperwork. Custodians will generally have specific account documents. If it turns out the custodian is something like the First National Savings and Loan of Abu Dhabi, I suggest you walk out.

2. Do not make out an investment check (or any other kind of check, for that matter) to your advisor or their firm name. If you have a deposit, make the check payable to the custodian. And get a receipt. Big brokerage firms have computerized receipts with your account number printed on them. See somebody called a "wire operator." Small, one off shops? Well, if you get a receipt hand-written on the back of a claim check from the Drink & Drive, take that walk again, but don't forget to get your check back.

3. Do not ask your advisor to be the trustee of any trust you may have, unless she's a friend of the family for years. Make that your family, not, for instance, the Gambino family. If your advisor suggests being a trustee, "No" is the correct answer.

4. Do not give your advisor the authority to write or sign checks (or any documents for that matter) for you. Ever.

5. Do not allow an advisor to transfer assets to another account-yours, mine, ours, theirs, without putting that authorization in writing as to whom it goes, their address, account number, amount and date of transfer. Make sure it is a limited one-time transfer by preparing a specific letter of authorization.

6. Do not give an advisor a Standing Letter of Authorization (SLOA); i.e., an unlimited one, unless you use it for a specific bill paying service, for instance. Even then, make sure the SLOA is very specific.

7. Never, ever, allow an advisor to have access to your account via the online account services most reputable firms have. Keep your username and password to these accounts in your little brown moleskin password book. Have a backup brown moleskin password book for when you lose the first one. Change your password frequently. While I think of it, check your accounts online weekly.

8. If you have negotiable paper securities, never send them to an advisor. They're antiques and are probably worth more than their market value as securities.

9. Do not ever have, open or allow an account with your name and an advisor's name on it. There's that walk thing again.

10. Check your account statements monthly, and check the online balances. Pay particular attention to the transaction pages, and look for any fees deducted, items paid you do not recognize, credit card payments or checks written. Reconcile the statement.

Does this sound like a lot of work? Remember, it's your money. What's it worth to you?

A lot of these steps become routine if you do the upfront investigation of your advisor.

There are plenty of solid advisors out there. Do your homework and find one. If you can't find one, ask us.


John Lohr

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.