There is one simple, almost sure-fire way, to prevent investment fraud such at that perpetrated by Bernie Madoff.
Use only investment advisors that use large, reputable custodians to handle your assets.
4 Ways A Custodian Protects You From Investment Fraud And 4 Questions To Ask
Reduced Opportunity For Investment Fraud
Since your investment advisor does not have custody of your assets this means they never directly handle your checks, deposits, or withdrawals. This reduces the opportunity for fraud.
When an investment advisor uses a custodian although the advisor can direct withdrawals to be made, those withdrawals must be direct deposited to another account of yours, or sent by check to your address on file. Withdrawals that are to go elsewhere require your signature, and the custodian is responsible if money escapes your account due to a forged signature.
Advanced Technology Protects You From Investment Fraud
Large custodians have advanced technology that can detect signature fraud. A prime example of this: at one point our investment firm sent the same form, signed by a client, to our custodian twice. The custodian's signature identification technology was able to detect that the signature was identical to one they already had on file, and they rejected the form.
This type of technology means that if a rogue investment advisor, their staff, or anyone, attempted to forge your signature, it is likely it would be immediately detected.
Insurance Carried By Custodians Protects You From Investment Fraud
If a custodian did allow money to leave your account, and it was not according to your instructions, it is their responsibility to remedy the situation. Reputable custodians have insurance in place to protect you against such a situation.
Duplicate Statements Make Investment Fraud Easier To Detect
Your custodian will send monthly or quarterly statements directly to you. They must report all the activity in your account directly to you.
In addition, your investment advisor may send you performance reports or account statements generated by them. This duplicate reporting system makes fraud easy to spot.
If you use an investment advisor that does not use a large, reputable custodian, and instead takes custody of assets themselves, and generates their own account statements, they can report anything on that statement. There is no third party verifying that you really own the assets they say you own. This is how Bernie Madoff perpetuated his fraud year after year.
To protect yourself from investment fraud, before making a new investment, or hiring a financial advisor, ask the following questions.
Ask The Following 4 Questions To Avoid Investment Fraud
- Who is the custodian of my assets?
- What type of fraud detection technology does the custodian have in place?
- What type of insurance does the custodian provide if fraud does occur?
- Who generates my account statements?
