Kenneth Starr, not the blue dress, Monica Lewinsky one, was indicted on a $30 million fraud charge last week. Like Bernie Madoff, Starr was known as an advisor to the stars with clients such as Al Pacino, Sly Stallone, Martin Scorcese, Diane Sawyer, Henry Kissinger, and others. Also like Madoff, these clients violated the number one rule when working with a money manager or advisor: never let the advisor custody your assets.
What does that mean? You do not want the advisor to control or hold your money. You must require that the money be held at a third party, independent custodian like Schwab, Fidelity, TD Ameritrade or any other regulated brokerage with SIPC coverage. By doing so, you are putting a wall between your money and the advisor. You should only give an advisor a limited power of attorney to perform functions like placing trades in your account and possibly removing their fee from your account. They should not have the ability to move assets from one account to another or change personal information like your home address without having you sign a form. Most custodians will require your signature or permission to conduct these activities.
Another lesson is don’t get caught up in the advisor’s client list. If they manage money for professional athletes or movie stars, don’t get enthralled with the thought of having your money managed by them. Most frauds happen where the advisor is seen as a star or where the client base is a who’s who. Also, don’t just take a friend’s recommendation for the advisor. Do your homework on the advisor. Check the advisor’s background at the FINRA or SEC site. Ask tons of questions including the advisor’s compensation structure. Personally, I prefer a fee-only planner who receives no compensation from commissions, but I am biased.
It is hard enough making money in this investing environment. You certainly don’t need to lose money to fraud to jeopardize your financial future.