Trusting your retirement savings with someone else is difficult. If you’ve spent your life working hard, the last thing you want to do is lose your retirement because of a fraudulent advisor. Bernie Madoff is a name that a lot of people in retirement planning associate with fraud.
After all, Madoff stole around $20 billion (1) in principal funds from his clients, although his firm stated they had returns of $65 billion.
If you want to secure your retirement, you need to know that your advisor isn’t pocketing your money and spending it to live the life of a billionaire.
Today, we’re going to talk about safeguarding yourself against the Bernie Madoffs of the world.
Quick Background on Bernie Madoff for Everyone That Doesn’t Know
Bernie Madoff’s activities, initially, were legal. He setup custodianships so that he could manage his clients’ money. When you sign over custodianship, you’re putting a lot of trust in an advisor because manipulation can occur.
There’s a lot of oversight, but as we saw with Madoff’s business, regulators didn’t regulate him or his books like they should have.
He had free rein to move money to accounts, forge return numbers and get away with living the life of a billionaire in the process.
99% of Financial Advisors vs Bernie Madoff
Madoff ran a Ponzi scheme, and he did it exceptionally well, even though the activity was obviously illegal. When you hire an advisor, 99.99% of the time you’ll be hiring someone that isn’t Madoff.
You’re going to give someone access to your money, but it’s different than what Madoff was able to do.
When you work with someone – like us, for example – we use a third-party custodianship, which puts your money into Charles Schwab. You can also have money put into Fidelity, TD Ameritrade, or another custodian. It’s very difficult to create your own custodianship. These custodians will provide oversight for you.
For example, these entities create the statements that are sent to you so that an advisor can’t say, “hey, you made 15% returns,” when you really made 2% returns this year.
Bernie Madoff was able to manipulate the statements sent to his clients, who thought they were making a ton of money. Investors were happy to see their portfolios go up and didn’t question their statements.
Madoff, for all of the bad that he did, caused a shift in the way financial advisors can manage money. Oversight and regulations that allowed him to get away with his scam have been strengthened to provide safeguards for investors so that their money is safer in the hands of an advisor.
One of the protections that are in place now is that you own the entirety of your account.
Let’s say that we were managing your money and you decided that it’s time to go in a different direction. You could:
- Contact Charles Schwab
- Remove us from the account
You can log into your account to see the activities going on, which does provide some level of peace of mind that your funds are being managed properly. The custodian even prepares all of your tax documents.
Administering Your Account on Your Behalf
As an advisor, if you allow us to administer your account, we do have the power to put in an order to send you funds from the account. The power of an administrator provides us with some opportunities to manage your account, but you’ll never be able to ask us to personally write a check on your behalf.
And that’s a good thing.
The majority of advisors are setup in a similar way to us so that they don’t have the custodianship over your money. A third-party, well-known custodian will provide the oversight and protection necessary to keep your money safe and secure.
Licensing and an Advisor
Industry certification is a must-have in financial planning and the insurance industry. Your advisor should meet all of your state requirements and have the required certifications.
For example, we’re certified financial planners, but we’re also FINRA licensed.
FINRA provides oversight in the world of securities, and they have a variety of licensing available. Licenses offer protections that allow you, as someone looking for a financial planner, to have some peace of mind that your advisor is someone legitimate.
You should ask your advisor about their licensing and even go to your state’s board to learn more about licensing requirements.
If you look into 5 advisors and one says, “no, I don’t need a license,” that should be a red flag that maybe something isn’t right.
But licensing alone doesn’t mean that you can’t be taken advantage of or enter into a Ponzi scheme. Licensing should be seen as a bonus and adds credibility to the advisor, but that’s not the only thing that you should be considering when choosing a financial adviser.
Structure of the Advisor’s Business
Advisors can structure or setup their business in different ways. We’re setup as an RIA, or registered investment advisor, which gives us the ability to act on the behalf of our clients. Since we’re an RIA, we’re held to a fiduciary standard.
What does this mean?
This means that we have to put the client’s interest above our own. You’ll find that broker dealers and agents have their own setups.
And there are different ways that advisors are paid. For example, we’re paid a fee for managing money. We don’t receive commissions on transactions, so there’s no incentive for us to push you to one security or financial vehicle over another.
Brokerages, on the other hand, may be reputable, have a license and can push you to a mutual fund or other investment option. These brokers can sell mutual funds, securities, etc.
You should go to your state’s site and try to find out if the person you’re dealing with is licensed. Licensing means that the advisor is being regulated and must remain compliant.
Money Transfer the Right Way
Even if someone is licensed, this doesn’t mean that there aren’t ways in which fraud can take place. The biggest concern is when money transfers occur because there’s a standard, “right way” for these transfers to take place, and a not-so-standard means of transfers.
What’s the Right Way to Transfer Money?
The right way to transfer money is to write a check to a custodian company, not the investment company themselves. Custodians are highly regulated and are the safest option for transferring money.
What’s the Wrong Way to Transfer Money?
Let’s assume that you’re working with XYZ Corp and you want to invest funds. If you’re making a check out to XYZ Corp, you’re handing over your money directly. The company may be honest and put the funds into your account, or some or all of it can be taken.
It’s not a good idea for you to write checks directly to the financial advisor unless it’s to pay their fees.
When you read about Ponzi schemes, 99.99% of the time, the investor writes a check to the investment company that will then “disperse” the money to your account. If you’re not writing a check directly to the custodian, you’re putting yourself at risk.
Investing your money is always a risk, but you shouldn’t have to stress when you put your trust in a financial advisor. If you do your due diligence, you’ll be able to reduce the risk of being a victim of a Ponzi scheme.