Protect Your Retirement Savings: How to Verify Your Financial Advisor can be Trusted

By Jimmy Pickert, CFA, CRPS®

Jimmy Pickert, CFA, CRPS®

Jimmy Pickert, CFA, CRPS® Portfolio Manager

Last week I watched the two-part TV series, Madoff. The made-for-TV movie chronicles the exploits and downfall of notorious white collar criminal, Bernie Madoff, the manager of the multi-billion dollar hedge fund. Except that it wasn’t a hedge fund—it was a Ponzi scheme. Put simply, investors were giving Madoff their money to invest, but he just put it in his bank account and then lied to them about achieving great returns every year. When it all hit the fan at the end of 2008, roughly $65 billion of investor money had been swindled.

The movie left a bad taste in my mouth, and it wasn’t just the bad acting. I’m sure plenty of viewers out there are wondering: how can investors be confident that the stewards of their money are doing everything on the up and up? After all, Bernie built his scam on his strong reputation and the trust of his investors. Even when a few individuals finally started raising the alarm, SEC inquiries still didn’t turn up anything wrong. Ultimately, nothing can fully replace healthy skepticism and the instinct that if something sounds too good to be true, it probably is. However, investors can take other steps to protect themselves.

Ask where your money will be held. If your advisor has you making out checks to them personally or their company, that’s a red flag. Generally speaking, advisors should use custodians—companies like Charles Schwab or TD Ameritrade—that hold the money and issue statements. These custodians are a separate entity from the advisor, who just makes the investment decisions in the account without ever having personal access to the money. It’s worth pointing out that firms that don’t use custodians aren’t necessarily fraudsters—hedge funds for example do derive a competitive advantage by keeping their investments close to the vest. But if you’re dealing with a firm that doesn’t use a custodian or issue holding statements, you dig deeper in other ways.

Watch out for guarantees or consistently incredible returns. Anyone who promises you that your investment won’t lose money isn’t telling you the truth. Investment returns are achieved by taking risk, and that risk, almost by definition, does not pay off every time. By the same token, if your advisor is hitting home runs every single year—especially when it seems like everything in the market has been suffering—then you should seek additional verification.

Research the advisor. There are a number of online tools that you can use to check an advisor’s background. In addition to verifying that they are appropriately registered, you can see whether any complaints or criminal charges have been lodged against them. The Financial Industry Regulatory Authority (FINRA) offers this tool. If you’re wondering what a bad report looks like, click here.

Ask stupid questions. Or put another way, there is no such thing. Any question is on the table, and the more you ask the better chance you’ll have of uncovering something if there is something worth uncovering.  Ask about the investments being used and about the process used to identify them. Sure, some things really are proprietary just like Madoff claimed in the movie. However, any advisor should be able to shed some light on how they approach investing. Even if your long line of questioning doesn’t catch an advisor’s fraud, it may catch his incompetence.

It’s important to make sure that your advisor not only knows what they’re doing, but that they’re doing it legally and ethically. Bernie Madoff wasn’t just scamming the ultra-rich out of a portion of their slush funds—he ruined the retirement prospects of thousands of Americans and drained charities and foundations of their funds. It’s a real threat that should be taken seriously.

— Posted on February 08, 2016 by Jimmy Pickert, CFA, CRPS®

— Topics: 401(k), Investments, Retirement, Wealth Management