Investor fraud has become an all too common newspaper headline, affecting individual investors, charitable organizations, and even pension funds. Here are four common sense tips that may prevent this costly crime from happening to you.
1. Know your advisor.
Advisors are registered with government organizations. You can research a firm’s registration and review any record of past complaints with either the Securities and Exchange Commission (www.sec.gov) or your appropriate state regulatory agency. If a firm is a broker-dealer, you can research its complaint history with the Financial Industry Regulatory Authority (www.finra.org).
You should also be aware of what you have authorized your advisor to do. For example, if you have granted your advisor discretion over your investments, you have given them permission to buy and sell investments to meet your stated objectives without your approval for each individual trade.
2. Know your investments and account(s).
If you are invested in publicly traded stocks, bonds, ETFs, and mutual funds, you can check their reported returns against your own portfolio. Publicly traded securities are listed on major exchanges like the New York Stock Exchange and are valued independently at least daily, if not minute by minute, when the exchange is open.
If you can’t look up the prices and performance of what you own in the newspaper or on the internet, that’s a red flag that you should ask more questions. Should you choose to invest in complex securities like private placements then you have additional homework to do.
Also, review your account statement each month, specifically the transactions section, as it shows any money coming into or out of your account.
3. Use an independent custodian.
By using an independent custodian, there is objective, unbiased pricing of your portfolio’s underlying securities. Custodians like TD Ameritrade and Fidelity Investments receive security prices through well-known, third-party pricing vendors, or directly from issuers. In many cases, prices are provided on a real-time basis.
Advisors who serve as their own custodians, such as Bernie Madoff, may be able to manipulate the prices reported to clients, showing winning performance year after year despite the ups and downs of the market.
4. Check on protection.
Most familiar custodians are members of the Securities Investor Protection Corporation (SIPC).
The securities in your account are protected up to $500,000, of which $100,000 may be applied to cash. (For additional information on SIPC coverage, please visit their website at www.sipc.org.) Some custodians even provide additional coverage on top of the SIPC’s guarantees. It’s important to note that SIPC protection and supplemental coverage protects against losses due to brokerage failures, not market value declines.
As a final caution, beware of investments touting consistent annual returns that are out of line with established benchmarks. If it sounds too good to be true, it almost certainly is!