Avoiding Financial Advisor Fraud
With all the craziness in the world, you probably have given little thought to the investment portfolios of such celebrities as Sylvester Stallone, Uma Thurman, Caroline Kennedy, Martin Scorcese, and Henry Kissinger. These are just some of the high profile clients of investment advisor, Kenneth Starr, who was criminally charged last month with fraud.
Starr allegedly diverted $59 million from 11 clients to such luxuries as a large New York condo with an indoor swimming pool and a 1,500 square foot garden. The advisor – no connection to the Clinton prosecutor – "cultivated business at charity events and lavish parties, bridging the world of New York and Hollywood to build a star-studded client list of socialites, financiers, philanthropists, A-list actors and Hall of Fame athletes" according to the New York Times.
It is interesting to see how celebrities are drawn to high profile advisors as a status symbol. Starr, like Madoff before him, used exclusivity as a means of attracting investors. The troubles of the rich and famous can be instructive to us common folk as well. These scams highlight the importance of utilizing a few simple methods for avoiding such fraud.
The key to your protection: Make sure your investment advisor uses an independent, reputable custodian to hold your assets. Madoff not only directed his clients' investments, he acted as the broker, clearing agent, and custodian for all of their accounts. Starr is alleged to have had power-of-attorney or signatory authority over his clients' accounts. This gave Madoff and Starr complete access to their clients' accounts without any verification as to what they were doing.
A third party custodian (such as Schwab or Fidelity) helps to prevent such fraud. An independent custodian confirms the assets in your accounts through monthly statements and real-time access via the internet. You should not rely solely on what an investment advisor reports. Trust, but verify.
As an added protection, while you may grant your financial advisor the right to make trades within your accounts, you can restrict the advisor's ability to make distributions from your account. You should retain the sole authority to withdraw money.
Please feel free to pass this newsletter along to Sly and Uma.
Words of Wisdom
Don't confuse fame with success. One is Madonna; the other is Helen Keller. -- Erma Bombeck