Some jerk has been arrested and charged with swindling rich people out of millions of dollars. Again. This happens every few weeks and each time it does a small part of me dies. I die a little bit because I know that each example of this makes life that much harder for the thousands of advisors who do right by their clients and are deserving of their clients’ trust.
The real pain of this, beyond the actual money lost, is that it is 100% preventable, if you (the client) are willing to do a few simple things. Most of them fall under what our late 40th president would call “trust and verify.” None of them require any heavy lifting.
See if you can answer the following questions about your accounts:
- Who has your money? Not “who is your advisor?” or “who manages it?” but who holds the actual dough? In our company we use Schwab and Fidelity as our custodians. We do not take possession of our clients’ assets, Chuck & Fido do.
- Who prepares the monthly and quarterly statements? The answer should be the same as your answer to question #1. Your advisor should offer you additional insight into how your portfolio is behaving but the custodian should be sending you an accounting of what’s there, and what’s happened to it the previous month.
- When was the last time you looked at your statements? The answer should be within the last 90 days. Because custodians want to save money on mailings they are now typically making the statements available through their web site. While well-intentioned and reducing the avalanche of paper, this just makes it easier and more likely that the client will blow it off and not look at them.
- Who can move your money, and where? If any broker, money manager or financial advisor asks you for a general power of attorney you are better off just dialing 911 now and avoiding the rush later. In many cases, clients want an advisor to have specific authority to move money to specific accounts that the client has designated. That’s kosher, but general powers of attorney are often followed by ‘due diligence’ trips to the Caymans and a suspicious upgrade in the advisor’s real estate portfolio.
Every investor should be able to understand exactly what they own and its role in the client’s portfolio. Many of the sins listed above are cloaked in language designed to confuse an otherwise intelligent investor with discussions of “black boxes” and “proprietary strategies” under shrouds of confidentiality and trade secrets. This isn’t surgery folks.
Finally, look in the mirror. The only way to con someone out of big money is with their unwitting cooperation. Bernie Madoff’s gift was appealing to arrogance and entitlement. He made his clients feel like they were special and were not subject to the laws of economics, finance or physics. They believed it and paid for their sins.
You are not that special: you are not entitled to out-sized returns without risk. I don’t care how rich, handsome, successful and well-educated you are (or think you are). If you ever catch yourself in such a position of arrogance the chances of you being taken go to the moon.
The price of inaction
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