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Avoiding Fraud from the Boston Globe
© 2008 QRS Wealth Management LLC. All rights reserved. Disclosure Information
Quality Advice Results in Your Financial Success
How to keep your investment adviser from robbing you blind Basic rules of financial disclosure and protection can close the door on frauds By Lynn Asinof, Globe Correspondent | May 27, 2007 Could it happen to me? That's often the first question people ask when news breaks that yet another investment adviser has bilked his or her clients of millions. Recent headlines have been about Frank J. Russo, a Wakefield man who allegedly defrauded his clients of more than $20 million, costing many their homes, their nest eggs, and their children's college savings accounts. A few years ago, it was Bradford C. Bleidt who confessed to pocketing more than $27 million of his clients' money, using much of it to buy a radio station. Yet neither Russo nor Bleidt could have succeeded in these scams if their clients had followed some basic investment rules. "The bottom line is that it's your money," said Michael Broad, a Newton financial planner and investment adviser. People need to take responsibility for actively monitoring their portfolios, no matter who's actually handling the investments. Investors, he said, will sleep better if they remember Ronald Reagan's famous adage: "Trust, but verify." In recent years, investors -- overwhelmed by complicated investments and worried about volatile markets -- increasingly have sought help in navigating the financial waters. Many want advice only, but others hand over management of their portfolios, often because they lack the time, believe they aren't sophisticated enough to make portfolio decisions, or simply want a professional at the helm. But investors who turn their financial matters over to others can open the door to fraud if they don't build the necessary protections into the relationship. So, here are the basic rules. Follow them and you won't find yourself worrying about the safety of your money the next time investment-adviser fraud makes the news. Demand disclosure: All investment advisers are required to register, either with the state or -- if they're large enough -- with the US Securities and Exchange Commission. Regulations say advisers must provide you with a copy of Part II of Form ADV, which outlines fees, services, and investment strategies. If they don't automatically provide one, ask. If they can't provide one, go elsewhere. You can also check out specific firms at the SEC website by going to adviserinfo.sec.gov. The North American Securities Administrators Association website at NASAA.org offers information on state regulators and ways to protect against fraud. Taking the time to check can pay off. This month, the state brought charges against Joseph Gennaco of Winthrop, alleging he sold fraudulent insurance products in a scheme that targeted the elderly. If those people had first called the secretary of state's office at 1-800-269-5428, they would have learned that Gennaco lost his registration back in 2001. Create a closed system: This keeps other people from gaining access to your investment dollars. Start by ensuring your initial investment check is made out to an account in your name at the bank, mutual fund company, or brokerage where your funds are being deposited. Neither Bleidt nor Russo used such "custodial" accounts. Instead, clients either handed over their money directly or wrote checks to the investment adviser's firm. Make sure it's legit: Anyone with a computer can print up an account statement, so make sure that your custodian is a well-known and respected firm. Companies like Fidelity Investments, Charles Schwab Corp., and TD Ameritrade Inc., all major firms, are commonly used as custodians by Boston-area investment advisers. If your adviser uses a firm that you don't know, check it out to make sure that the custodian isn't simply a fiction created by your adviser. One place to start is the National Association of Securities Dealers, which provides a broker search tool through its website at nasd.com under "Investor Information." Limit access: Legitimate investment advisers or money managers never actually want to handle your money. They simply want the authority to trade your accounts. Set up the account so your adviser has a limited power of attorney that allows trades, but keeps him or her from ever taking money out of your account. Confirm transactions: Faced with a worried client last week, financial adviser Robert E. Hurley of Stoddard Management Co. in Rockland urged the client to phone the custodian once the account was set up to make sure that the all funds were exactly where they were supposed to be. "Bypass me," Hurley told the client. "Call and confirm." And he told the client he could do a similar check after any major transaction. Compare statements: Prosecutors say Russo sent phony monthly statements to assure investors that they were earning healthy returns. Use of custodial accounts would make that kind of deception impossible since custodians are required to send their own statements directly to investors, said Kim Yoshida, senior vice president of fee-only Needham Advisory Corp. in North Andover. "You can also access your account online," she said, recommending that investors take the time to compare activity on both sets of statements. Instituting such checks and balances makes it tough for investment advisers to help themselves to your money. Still, these rules do nothing to protect you from damage caused by bad advice. "Fraud is relatively uncommon, but it grabs headlines," said Gary H. Schatsky, a past chairman of the National Association of Personal Financial Advisors, an organization of fee-only comprehensive financial planners. "Much more damage is done by incompetence and conflicts of interest." Careful shopping is the best protection against self-interested or unskilled advice. Put together a list of recommended advisers, check them against the fraud-protection rules, then ask about their track record, their investment philosophy, and the way they interact with clients. Finally, make sure that their fee structure eliminates possible conflicts of interest. If you're not sure what questions to ask, log on to the NAPFA website at NAPFA.org for an 11-page guide that covers everything from fees to references. © Copyright The New York Times Company |