Friday will mark the one-year anniversary of an event many in the investment advice business would prefer to forget.
That is the arrest of Bernard Madoff, kingpin of the largest Ponzi scheme in U.S. financial history. Now spending the rest of his life behind bars, Madoff brought on financial devastation for thousands with his thievery. His victims are still coping with the fallout.
In the year since Madoff's arrest, many investors have become more careful about whom they select to advise them on investment matters. Some, I'm sure, will not seek any outside help for fear of encountering a similar crook.
The sad reality, however, is that Madoff's multi-billion-dollar fraud will not be the last time a financial adviser is charged with stealing from clients. By my count, the U.S. Securities and Exchange Commission has brought fraud charges against more than a dozen advisers, brokers or hedge funds this year alone.
That's why I think it's worthwhile to revisit some of the steps you can take to make sure you're not the victim of financial fraud. Few of these recommendations are original, but I think we've all learned you can never repeat them too often.
Some of these suggestions I included in the first column I wrote about Madoff in the days after his arrest; others are new.
Trust but verify.
This is the attitude I would adopt when dealing with anyone you hire to help manage your investment portfolio. Even if you have an adviser you trust completely, you should still look over that person's shoulder.
Periodically, check on the adviser's actions and try to understand why the adviser is taking them. And if you don't understand, ask questions.
Don't adopt a total hands-off policy. After all, it's your money.
Know your custodian.
A custodian is the investment firm that holds on your behalf possession of your stocks, bonds, mutual funds and other securities. It could be a large firm like Fidelity, Vanguard or Scottrade, or a smaller broker-dealer whom you've never heard of.
If you're dealing with an independent firm, the custodian should be an outside third party. If you use a full-service brokerage firm like Merrill Lynch or Morgan Stanley, that firm will hold custody but there is separation between the broker and the custody side of the business.
Be careful writing checks.
Never write a check to the individual adviser or to the adviser's firm when depositing funds into an account. Instead, the check should be written out to the custodial firm.
If it's a new investment account, as an added measure of protection, make sure the account is already set up and that you know the account number before depositing funds into the account.
As soon as an investment account is set up, make sure you know how to view the account online. Don't wait; view the account online right away so that you become familiar with the site, how to access it and the information presented.
I would not do business with any firm that does not allow you to view your investment accounts online.
Once the account is up and running, check periodically to see what's happening and view any trades your adviser is carrying out.
Visit their office.
Many of the investment custodians used by independent advisers operate retail branches throughout the country. These firms include Charles Schwab, Fidelity, Scottrade and TD Ameritrade.