Guarding against bad advisors

Doug Horn

In one of my industry publications, Investment News, a recent article by Hilary Johnson discussed some of the poor decisions clients made, and as a result made it easy for Kenneth Starr, who owned Starr Investment Advisors LLC, to allegedly defraud those clients of over $30 million. The clients were from all positions in life, retirees to a number of stars that most of us would know. While this firm may have been headquartered in New York and most likely does not have local clientele, it is not unreasonable to assume a firm of questionable intentions from inside or outside our region could solicit locals to become clients. This was proven a fact by the actions of Dennis Bolze, who pleaded guilty last November to running a Ponzi scheme and defrauding clients in excess of $21 million, including many residents here in East Tennessee. When this occurs, the question becomes, “How do you protect yourself?”

One of the key issues is “custody” of the client’s funds. This is where most frauds begin, because without possession of your money, it is far more difficult for an advisor to defraud one of their clients. So, what is custody? While simple sounding, this can be tricky especially when dealing with someone who is intent upon walking away with part or all of your hard-earned wealth.

Custody starts with the client writing a check payable to the advisor or the advisor’s firm. If the check is for services performed such as tax preparation or the development of a financial plan, then making a check payable to the advisor or their firm is not an issue. However, if a new investment is being made and the check is still made payable to the advisor or their firm, then you as the client need to be very clear of the firm’s processes and controls.

Regardless of the firm’s size or breadth of reputation, anyone can be a victim of financial fraud if simple measures are not taken to safeguard your assets. Such questions could include the following:

• Where and who will be holding the investments?

• Is that firm a member of FINRA and SIPC?

• How was this custodian selected and how will transfer of securities take place?

• Are confirmations of deposits and transactions provided by third parties, i.e. the custodian?

• Are the fees charged within normal guidelines?

• Is the advisor promising positive returns and potentially unreasonable results?

The more questions asked of the advisor and the willingness and openness of their answers about their procedures, controls and relationships with other firms will go a long way toward separating questionable advisors from those worthy of your trust. Promises of better than average returns or guarantees against losses from proprietary strategies should raise doubts and remind you of the old adage “if it sounds too good to be true, it probably is.”

For assistance with insurance, estate planning and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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