When you think about the "safety" of your money, what goes through your mind? Do you have panicked visions of your advisor absconding with all of your life savings, a la Bernie Madoff? Do you fear that the bank or institution that holds your money and investments could close its doors, sending you scurrying to find a way to get access to your assets? Do you have night sweats about the market melting down and everything you own being wiped out overnight?
While risk is a part of life, savvy investors know that there are some protections that can mitigate some or most of these risks. The best defense for investors is to educate themselves about what are the actual risks involved, and to separate true risk from irrational fear.
For example, while Bernie Madoff was an extremely high profile and egregious example of a dishonest investment advisor, most advisors are honest individuals committed to helping their clients, not exploiting them. However, even then, many clients don't know that there are certain protections in place to prevent a dishonest advisor from taking advantage of them. Clients' assets are usually custodied at a separate institution called a "Custodian". We use one such custodian called "Etrade Advisor Services". The Custodian is completely separate from the advisor and provides for the safekeeping of your assets, independent of and separate from any personal or corporate accounts that the advisor may have. Advisors are not permitted to comingle clients' money with their own and an advisor with United Planners Financial Services, such as those at JWM, are prohibited from accepting any client checks made out to the advisor or their firm. Advisors are also strictly regulated and monitored for the activity that takes place with assets moving in and out of their clients' accounts. An advisor is not permitted to change the bank information linked to your investment account or even change the address of record for an account. Only the client can make these changes, which means that checks sent to the client from their account or money moved from their account to their bank electronically (called ACH) will always go to an account or address the client themselves specified.
Regulations require that all changes in cash in your accounts also be reported to you periodically and that any money sent out to third-party recipients (anyone other than you) also be reported to you. This information is provided to clients online via the portal that most clients have login access to, along with paper reports they may receive from time-to-time. Finally, in the hierarchical world of security regulation enforcement, oversight bodies like FINRA and the SEC monitor the diligence of compliance efforts by investment firms, such as United Planners, and audit these companies regularly in search of oversights or lax procedures. The regulated investment companies are, through these efforts, held to a high level of supervision of their advisors, whom they too audit regularly to check for irregular procedures. This even includes checking the advisors bank accounts for deposits that cannot be explained!
In a future blog post, we'll explore some of the other protections that exist to mitigate risks against a custodian (or a bank) closing its doors and, of course, the fear of a market meltdown wiping out all of your savings. Yes, although risk never can be completely eliminated (with investments or in life in general), it sure beats burying your cash in a coffee can in the back yard!
Rich Jacobson is a Registered Principal Offering Securities and Investment Services through United Planners Financial Services, Member: FINRA, SIPC. JWM and United Planners are independent companies.