How to avoid investment scandals

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Everybody wants to avoid investment scandals like for example the Bernie Madoff situation in the past. There exist hundreds of companies and government associations on the topics of real world retirement planning, short term retirement planning and investing for income. 

It is amazing that many investors will hand over their life savings without so much as asking a few basic questions. It is not necessary that anyone should have to endure the loss of their life savings to a crook. But sometimes there are people which are either so lazy, or so greedy, that they are not willing to spend a few hours learning how to hire the right people, and avoid the wrong ones. If they do this they will get what they deserved.

After it has taken place nobody can understand what Bernie Madoff did. It was atrocious; taking investor money, and making up fake investments to put on their statements. You can imagine? Do you know why he could get away with it for so many years? Because he made up his own account statements. That is the reason.

But there is one, easy, sure-fire way to avoid this type of scandal with your investments. You should only use investment advisors that do not actually have custody of your assets.

And what does this mean? This means that your advisor only opens your account at a large, well known firm, such as Fidelity, Citibank, Schwab, Pershing, or T.D. Ameritrade. Yes, it is true, your advisor will have and must have the authority to make investment decisions on your behalf, and provide service on your account, but the difference: It is the custodian that actually has possession, or custody, of your assets, of your money.

If you react in this way, it is impossible for an advisor to make up transactions in his own pocket because there is a third party, the custodian, who is reporting all activity in the account directly to you and you can control it.

You must remember, your custodian and your investment advisor should not be one and the same. There are 3 reasons this helps protect you from fraud. Think about this. Since your investment advisor does not have custody of your assets then this means they do not directly handle your deposits, your checks or withdrawals. This results in a reduction of the the opportunity for fraud.

The advantage of large custodians is that they have advanced technology that can detect signature fraud. Also large custodians carry big insurance policies. For the case unauthorized transaction does occur they are responsible for allowing it to happen. And then in most cases their insurance would be required to cover the loss of money. 

For the case you are not sure how your advisor handles your account with your money you should call him and ask a very simple and important question about the custodian of your account.

03.02.2011