ByJustin Pritchard, CFP®
You’ve heard horror stories about financial advisors stealing from clients, and you may be understandably anxious about working with an advisor. But there are several ways to protect yourself from con artists. And with some arrangements, you can make it virtually impossible for an advisor to steal money from you.
Financial advisors provide a variety of services, such as investment management and financial planning. When an advisor takes possession of your money (also known as taking “custody”) for investment management, there’s an opportunity to steal those funds. The well-known Ponzi scheme involving Bernie Madoff involved a situation where Madoff’s firm had custody of client assets—making it easy to steal money.
This article explains why custody is important and reviews other tips to protect yourself. As a quick summary, here are the top ways to avoid problems:
- Only invest when the advisor uses a well-known, independent custodian.
- Consider hiring an advisor for advice only (so they never have access to accounts).
- Never provide passwords to anybody (even though it may seem like the easiest solution).
- When in doubt, trust your gut and pause.
For instance, when I work with clients, we either use a third-party custodian or clients choose to self-manage their assets. And I never want anybody’s password.
Ultimately, you might not be able to prevent sophisticated criminals from stealing money from you. But most thieves prefer easy targets. Think of this like items in your car: Locking your doors and keeping valuables out of sight prevents most problems. Similarly, making things difficult for con artists can help you avoid trouble.
Use an Independent Custodian
Most reputable financial advisors never take possession of your money. Giving them direct access makes it easy for them to steal funds. Avoid doing that unless you’re 100% certain that you can trust the person you’re working with.
Advisors like me use well-known third-party custodians, such as Charles Schwab & Co., Inc. Those custodians have no affiliation or shared ownership with the advisory firm, but they provide valuable services and they act as trusted intermediaries.
Tip: You can often remove a financial advisor from your accounts by calling your investment provider or custodian. If you lose trust in your advisor, this is a quick way to prevent further problems, and you don’t need your advisor’s authorization. You may still owe advisory fees (see your agreements), but you can protect your account.
Limit Advisor Permissions
The custodian can limit the activities an advisor conducts inside of client accounts. Based on instructions from the client (you often specify this when opening your accounts with an advisor), custodians can enable any, all, or none of these features:
- The advisor can place trades.
- The advisor can bill agreed-upon fees to the client.
- The advisor can request transfers between the client’s accounts (including bank accounts) and checks payable to the client.
Any third-party payments or transfers—to anybody other than the client—are typically restricted and require additional authorization.
All of those actions come with restrictions. For example, I’m required to notify clients and provide access to a detailed invoice every time I bill their accounts.
Continue reading below, or watch and listen to this information by video:
Note: The billing practice above might be considered “constructive custody” because the advisor has access to your funds. Because of that, it’s critical to use caution when authorizing billing or making payments.
Make Checks Payable to the Custodian
Whenever you deposit funds into your investment accounts, it’s critical to make the check payable to the custodian—not your financial advisor or the advisor’s firm. For example, when rolling over a 401(k) to an IRA, you might instruct your former employer to make the check payable to Charles Schwab, Fidelity, Vanguard, or another custodian. You can add additional information such as your name and account number to ensure that the funds reach your account.
Tip: Be sure to work with reputable custodians. If you’re not certain who’s getting the money, pause and do more research before moving forward.
When it Might Be Okay to Pay an Advisor Directly
There is at least one potential exception to the rule about not paying your advisor directly. If you’re paying fees for services, such as flat fees or hourly fees, it may make sense to pay your advisor’s firm. In that case, you might write a check to the firm, pay with a card, or pay via bank transfer. However, be sure to get detailed instructions and an invoice before making any payments.
Tip: Compare your invoices to your account statements to verify that the amounts match. Review your agreements to understand how and why you pay your advisor.
Research Your Advisor
It’s critical to research your advisor’s background before working together. You might know and like somebody from your community, but are they up to the task of helping you with your finances?
- Start by reviewing the advisor’s regulatory background through Brokercheck and IAPD.
- If the advisor has any designations, such as the CFP® certification, look them up through those organizations to research any disciplinary action.
- Run a quick web search through your favorite search engine, and include the advisor’s name and “scam,” “theft,” or any other relevant terms.
If your advisor has issues in their background, that may be a red flag—especially if those issues involve theft or fraud. But even if everything comes up clean, ask your advisor questions about how they work, and gauge their willingness to share information with you honestly. If things sound too good to be true—or if the advisor gets evasive—it may be smart to slow things down.
Never Share Passwords
It could be tempting to provide passwords to your financial accounts to your advisor. That way, they can just log in and take care of everything for you. But that’s risky because there’s virtually no limit on what somebody can do while logged into your account. For example, they may be able to:
- Set up transfers and payments to themselves
- Change the password, effectively locking you out (until you clean up the mess)
- Change your physical and email addresses to prevent you from getting updates (although you should get a notification when this happens)
- Take additional actions that are harmful to your finances
When you authorize an advisor to manage your accounts with a third-party custodian, they don’t need your password. They get access through their own login, and again, their abilities are typically limited to activities you authorize.
What if you want somebody to help you accomplish something online? Instead of sharing your passwords with your financial advisor, ask them to coach you through the process. If you insist on letting them type and click on your behalf, be present and maintain control whenever they do something in your accounts. At a minimum, it’s critical to be sitting next to them and watching everything (or sharing your screen and allowing control—which you can revoke instantly if they do anything inappropriate).
Important: If you share your password with others (including family members and anybody else), you risk losing your savings, and you may not have any recourse.
Monitor Your Accounts
You can’t control everything that happens in the world, but you can keep an eye on your accounts. Doing so could help you detect fraud and errors early, and it may prevent things from getting out of hand. While being an overactive trader is often counterproductive, monitoring account activity is wise.
The most important things to watch for are:
- Withdrawals from your accounts
- Change of address notifications (email or mailing address)
- New bank accounts linked to your accounts
- Unexpected logins from new devices
- Any other unexplained activity
Contact your custodian immediately if you see something you don’t understand. It’s also important to use general security practices: Enable two-factor authentication, set up text message or email alerts, avoid accessing your accounts on public Wi-Fi, and keep your devices up to date.
It’s also critical to be aware of other types of theft. For example, identity theft is not uncommon, and the threat often comes from inside your household (or from others who are close to you and may have access to your information). Elder abuse and exploitation are also relevant here. Unfortunately, we lose the ability to make optimal financial decisions as we age, and con artists regularly target older people (who also tend to have money to steal).
Uncomfortable With Your Advisor?
If you’re not comfortable with your financial advisor for any reason, there’s a problem. It’s best to work with somebody you can trust, and you’ll be unhappy and anxious until you find the right person. Remember that your gut may be telling you something valuable. Maybe your advisor isn’t about to steal your money—but you might be picking up on other problematic issues, so it’s smart to look elsewhere.
Resources to get more comfortable:
- Consider working with a fee-only financial advisor who is legally obligated to act in your best interests at all times.
- See what the steps are for switching to a new advisor.
- If you’re curious about working with me, see my pricing options.
The best ways to prevent a financial advisor from stealing your money are to avoid giving them access to your funds and keep your personal information private. The most concerned people I work with block out personal information on their statements (or they simply provide high-level information) and they only hire me to answer questions and run numbers. That approach can be cumbersome, and your advisor needs accurate information to provide meaningful advice (so you need to be sure you’re providing accurate details). But for some people, it’s the only acceptable way to work together.
