How to Steer Clear of Financial Rogues
How to Steer Clear of Financial Rogues
By Joe Mont
Though big name, high-profile fraudsters such as Bernie Madoff and Hollywood adviser Ken Starr grab the majority of headlines, on an almost weekly basis local and federal investigators nab a variety of brokers, financial planners and lenders for a variety of investment scams.
To give some perspective, a survey last year of certified financial planners found that 60% of respondents knew a consumer who had experienced fraud or abuse at the hands of another adviser.
The best defense, it is often said, is not to believe any promises that are too good to be true. A 25% return on your money? Dubious. Hitting that benchmark within 90 days? Impossible.
But beyond having a dose of realism, investors can engage in various methods — a little bit of homework — to ensure the person they entrust their money to has their best interests at heart.
The Financial Industry Regulatory Authority is the largest independent regulator for securities firms doing business in the U.S., overseeing nearly 4,700 brokerage firms and about 635,000 registered securities representatives. Its website includes a free tool to help investors research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers.
The database allows searches for brokers and brokerage firms, providing a background report with explanatory information to provide content and context. The data come from the Central Registration Depository, the securities industry’s online registration and licensing database. Information is obtained through the forms brokers, brokerage firms and regulators fill out as part of their registration and licensing.
In this public record are civil judgments and arbitration decisions; criminal convictions and indictments; settlements from arbitration, lawsuits and customer complaints; employment terminations for violations of investment-related statutes, fraud, theft or failure to supervise investment-related activities; bankruptcies filed within the past 10 years and outstanding liens and judgments; disciplinary actions pending from industry regulators and upcoming civil proceedings, according to the North American Securities Administrators Association, the oldest international organization focused on investor protection.
Investors can also get this information directly from their state securities regulator. Typically, the report is either free or comes at a minimal charge, and stockbrokers and brokerage firms are not told you’ve requested the information. NASAA offers an online map that will help find the regulator in your state or county.
The SEC can also be a valuable resource in the due diligence needed to protect your investments.
Registered investment advisers managing $25 million or more in client assets register with the SEC. If they manage less, they usually must register with a state securities agency.
To find out about investment advisers and whether they are properly registered, hunt down what is called Form ADV. The form has two parts — one with information about advisers’ businesses and whether they’ve had problems with regulators or clients, the other outlining advisers’ services, fees and investment strategies. Before you hire an investment adviser, always ask for and review their ADV. If they refuse to offer a copy, consider that a warning sign.
Indirectly, you can also review an adviser’s most recent Form ADV online by visiting the Investment Adviser Public Disclosure website.
If you find your research didn’t spare you from being ripped off, the SEC also offers online filing for complaints.
Another step to take before doing business with a brokerage firm: Make sure is is a member of the Securities Investor Protection Corp.
Much as the FDIC protects bank accounts, the SIPC provides limited customer protection (at most $500,000) for most types of securities — stocks, bonds and mutual funds — if a brokerage firm becomes insolvent. Losses from a decline in market value are not covered by the fund (although that might certainly be a game-changing perk).
The SIPC works either as trustee or, with an independent trustee appointed by a court, to recover funds. Since it was created by Congress in 1970, it has helped recover $108 billion in assets for an estimated 763,000 investors.
To qualify for SIPC coverage on an unauthorized trade, the proof of burden falls on the investor. This makes it crucial to create a paper trail and issue a formal, written complaint to your broker if you discover an unauthorized transaction in your account statement.
Because some brokers don’t execute buy and sell orders on their own, it is important to also make sure “clearing firms” also are in good standing with SIPC. All firms are required by law to tell you whether they are. But as a last resort, the SIPC has an online list of members and can field direct queries.
Though privacy restrictions may make getting one difficult, if not illegal, for the average person, credit reports can offer insight into whether the person handling your money is trustworthy, says Ken Springer, a former special agent of the FBI and founder of Corporate Resolutions, a private investigation firm with offices in New York, Miami, Hong Kong, London and Boston. His firm is often retained to handle character assessments for companies looking to hire executives or weed out problem employees.
Springer has seen a growing trend of people who resort to fraud because of out-of-control gambling habits. An often-overlooked aspect of credit checks is that every time a report is reviewed, the company that’s looking leaves an imprint — meaning the date of an inquiry is recorded. If a report sees frequent credit checks being made by casinos, it could be a red flag.
“While this may not be a problem per se, it is important for investors to know patterns of behavior, such as gambling, before the investment is made to ensure the money that is going to the individuals will not ultimately end up on the craps table,” Springer says.