How Your Investments Are Protected from Fraud
by Karey Edwards on Jun 12, 2018
While the vast majority of financial advisors and investment managers have their clients’ best interests at the forefront, there are a few unscrupulous ones who take advantage of hard-working savers. The likes of Bernie Madoff, Allen Stanford, and Frank Gruttadauria have understandably caused investors to question how their money is protected.
Securities Investor Protection Corporation
In response to a near collapse in financial markets in 1970, Congress enacted the Securities Investor Protection Act which established the Securities Investor Protection Corporation (SIPC). SIPC is as a private, nonprofit corporation that insures investors’ securities and cash held at brokerage firms that fail. When this happens, SIPC serves two primary roles. First, it organizes the distribution of cash and securities to investors. Second, to the extent cash and/or securities are unavailable, SIPC provides insurance coverage up to $500,000 (including up to $250,000 for cash awaiting reinvestment). Protection may also be extended to investors whose securities may have been lost, misappropriated, never purchased or even stolen. SIPC does not protect against poor investment decisions or loss due to market fluctuations.
Excess SIPC Coverage
When deciding which investment firm to work with, an investor should also investigate whether the ultimate custodian of the assets has any coverage protection in excess of SIPC’s limits. For example, NCA Financial Planners utilizes Royal Alliance as our broker-dealer and Pershing as our asset custodian. Pershing utilizes certain underwriters led by Lloyd’s of London to provide an aggregate loss limit of $1 billion for eligible securities over all client accounts. Additionally, within the $1 billion limit, there is a per client loss limit of $1.9 million for cash awaiting reinvestment. This coverage would apply if Pershing failed financially and client assets could not be located due to theft, misplacement, destruction, burglary, robbery, embezzlement, abstraction, or failure to obtain or maintain possession or control of client securities.
Tips on Avoiding Fraud
Be leery if investment returns seem too good to be true, especially compared to similar benchmarks or during periods of high market volatility.
Conduct a background check before working with a financial advisor or investment manager. The Financial Industry Regulatory Authority (FINRA), a financial services industry regulatory body, provides an online search through their Broker Check feature.
Ensure an outside custodian is involved in the execution and settlement of trades and preparation and mailing of client statements.
Determine if the financial advisor or investment manager invests personal money in the strategy or product being promoted.
Shy away from those who seem unwilling to fully explain their process and the entities involved.
While dealing with a financial advisor who works for a firm that is associated with a broker-dealer who processes business through a separate custodian may seem like a lot of layers, it is for the protection of investors.