(No. 3 in the series: From Dumb, Dumber & Dumbest To “Safe”, Safer & Safest)
The first thing you can do to avoid becoming a victim of a fraudulent, unscrupulous or incompetent financial advisor is to simply, not give him your money. If you write your advisor or his firm a check for the funds you want invested, you have given him direct access to your money. When an advisor actually holds, or custodies, your funds in this way, like Madoff did, he essentially has a blank check and only occasional oversight.
“Safe”-Use An Insured Third Party As A Custodian
Instead of letting your advisor hold your funds, you can have the funds held by a third party “custodian” brokerage and insured by the SIPC. With this arrangement, your advisor could still make bad investments that result in hefty commissions (if he is a broker) and/or losses that could reduce your portfolio to nothing (or worse in the case of a margin account). But, he can’t just withdraw the cash and provide you with fraudulent statements, because you will get a separate statement from the custodian. So, in that sense, the advisor at least may be “safe” from prosecution and jail, but your portfolio may be another matter.
(COMING NEXT WEEK: Safer-Keep Your Hand On the Controls)