How To Find An Honest Adviser Do Your Due Diligence Latest Ponzi schemer's sentencing is reminder of need for vigilance

By Paul Katzeff

R. Allen Stanford owned yachts, jets, a cricket team and a stadium. His net worth once reached $2 billion. But it was all acquired at the expense of more than 20,000 clients.

Stanford was sentenced on June 14 in federal court to 110 years in prison for concocting a Ponzi scheme that bilked $7 billion from investors in 113 countries.

His was the second-largest Ponzi scheme ever, lagging only Bernard Madoff’s $17 billion con game.

Three former Stanford executives are slated for trial in September.

It all shows that there’s never a shortage of bunko artists, says Ken Springer, president of Corporate Resolutions, which does background checks for investors, lenders and underwriters.

And that means individual investors cannot let down their guard when it comes to financial advisers.

“Whether you’re hiring an adviser or already have one, do due diligence to protect your money,” said Don Blandin, president of Investor Protection Trust, a nonprofit devoted to investor education.

Investors should take certain steps to safeguard themselves:

• Check a candidate’s credentials. Whether you need just investment management or additional services such as tax planning and insurance, you should only retain an adviser whose skills and training jibe with your needs. Check with whichever organization awarded the adviser’s credentials.

Some advisers, such as accountants, are licensed by the state.

Investment advisers with more than $100 million under management must register with the Securities and Exchange Commission. Advisers with smaller practices register with their home state’s securities regulator.

Trust, But Verify

“Don’t just find out if the adviser earned a certain credential,” Blandin said. “Make sure he’s still in good standing, hasn’t been on probation or disciplined and isn’t the subject of complaints.”

You can find that information and more in an investment adviser’s Form ADV, filed with the SEC or state.

Brokers and their firms file similar information with Finra, the industry group. Look up information in BrokerCheck online.

It’s also a good idea to see if a prospective adviser has been sued by clients or employees.

Look for news stories online. Some court records are available online. Others must be checked in person — by you or a hired runner or research service. A basic check for docket numbers can cost as little as $100. But an extensive search can cost thousands of dollars.

• Check references. “It’s one way to discover problems,” Blandin said.

But don’t stop there. “Even if references praise the adviser, do the rest of your due diligence.”

• Discuss pay. How much is your prospective adviser paid and how? Some compensation involves transaction fees. That can be an incentive for an adviser to trade, whether or not it’s in your interest.

• Ask the adviser to pledge fiduciary-level care for you in writing. That’s a higher legal standard than the one many broker-dealers have. Broker-dealers are allowed to take more risks with your assets.

• Insist on third-party custody of assets. That means the adviser does not hold your assets. And you get independent statements that verify your assets’ existence.

• Vet the accountant who provides the adviser’s statements to clients. A good accountant will have plenty of business and will be not be overly dependent on your adviser — or susceptible to pressure from him.