Confirming Your Financial Advisor Has An Institutional Custodian Could Help Protect You From Fraud

by Evan J. Stroman | August 2019

Charles PonziWhen choosing your financial advisor, ensure that he or she has a custodian. Ask: “what firm will have physical possession of my assets?” It’s a simple question, but failing to confirm that a custodial relationship exists means your money could be exposed to fraudsters.

A high percentage of scams are perpetrated by advisors and firms that have direct access to your money. For example, a fraudster will sell you illiquid investments (real estate equity, promissory notes, or mortgages) that do not require a custodian. In those situations, ensure you have a way of knowing how your money is actually invested.

In situations involving financial advisors, custodians take physical possession of your assets, since legitimate financial advisors are not allowed to come in physical contact with your money. Custodians are typically broker-dealers or trust companies that provide four primary services:

  1. Processing transactions when securities, funds, and exchange-traded funds are bought and sold;
  2. Collecting dividend and interest payments;
  3. Making distributions to you or a designated party; and
  4. Producing monthly statements that report holdings, your cost basis, and the current market value of your assets.

You can further vet the advisor you are considering by confirming that the custodian is company you trust. Do not send your assets to small custodians or firms you do not recognize—those may simply be shell companies under a fraudster’s control. Five institutional custodians are:

  1. Charles Schwab,
  2. Fidelity Institutional,
  3. Pershing/Bank of New York Mellon,
  4. TD Ameritrade, and
  5. LPL Financial.

Reports from independent custodians could assist in detecting whether you have invested in a fraudulent scheme. You may be able to compare statements provided by your financial advisor to those provided by the custodian. If your holdings, income, and transactional information do not match, there might be a chance your advisor is perpetrating a fraud.

Kozyak Tropin & Throckmorton

Evan Stroman
Evan focuses on complex litigation and has represented defrauded individual and institutional clients who were lured into Ponzi schemes, lost millions of dollars due to a fiduciary’s wrongful conduct, or who were fraudulently induced to enter into deceptive contracts with foreign manufacturers. As a CPA and former auditor, Evan is experienced in recognizing the improper flow of cash through an organization and pinpointing fraudulent activity.

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