Market Moves

Investment Advisor

Tips for Reviewing New or Current Financial Advisors


With the economy still a way off from returning to consistent positive growth, the last things we need are headlines about honest investors losing what’s left of their money to crooked financial advisors with Ponzi schemes. So, exactly how do you protect yourself from this added insult to injury? Here are three simple, but effective questions to keep in mind when reviewing your advisors, or hiring new ones:

  • Does your advisor “self clear”, producing all reports of your transactions within his/her own company? The downside to this is that there is no third party involved to provide trading records, making it very easy for fraud. The notorious Bernie Madoff self cleared, so when he wanted to show stock purchases for his clients, he simply made them up.
  • Does your advisor house, or custody, the money and investments with a third party, or is your hard earned money kept at his/her own firm? Many small or independent investment advisory firms are actually safer in this regard, because they house your money in large institutions such as Charles Schwab or Fidelity. These housing institutions produce and send you their own monthly reports, separate and apart from those provided by your investment advisor, providing you with third party reports to check against your advisory reports. Again, when there is another firm involved, you can verify that your advisor’s reports are real, not made up.
  • Have you noticed a sudden increase in the number of monthly transactions in your account? This may be due to something called “churning”, where your advisor is increasing the amount of buying and selling to increase commissions. Having an advisor who is fee-based, rather than commission based, is one way to minimize this risk. Another protective move is to check you statements periodically to insure that there is consistency month to month. If you have stated high risk-high reward objectives, then all this extra activity may be warranted. However, if you have specified caretaker treatment in order to protect you retirement nest egg, then lots of buying and selling could be a big red flag.

Keeping these tips in mind when reviewing your current advisors or hiring a new one will help protect your hard earned money.

Categories: General

2 Responses

  1. P. Hersey says:

    where were you when I needed this advice 30 years ago?

  2. Tom says:

    Just stumbled upon your blog. Great advice, and timely. Thanks