Is Your Advisor a Crook?

How can you be sure that your financial advisor is on the up and up? Your assets are too important for you to blindly trust the person you hire to tend them.

Here’s a sobering tale about an advisor who got caught stealing clients’ money. The theft occurred in Marlboro Township, N.J., but it could have happened anywhere. Jordan Zemlock, 50, an advisor/insurance salesman, was sentenced in mid-April to a maximum 10 years in prison for defrauding 20 clients out of $1.4 million. Most of these clients were senior citizens.

No one picked up on the red flag that his registration with a key oversight agency, the Financial Industry Regulatory Authority (FINRA), ended seven years ago. Zemlock, who pleaded guilty to theft by deception, was arrested a total of three times for taking money from clients and using it for personal expenses, instead of investing it.

This theft is alarming for a number of reasons:

First, most of the defrauded clients were senior citizens. This demographic is especially easy to cheat, and the situation only will get worse as aging baby boomers crowd the retirement rolls.

Second, Zemlock’s swindling 20 clients of $1.4 million means the average client had $70,000 stolen – a small enough sum for many investors to overlook. Apparently, the fraud took place between August 2009 and March 2012, when Zemlock’s victims confronted him.

Third, Zemlock was not registered with FINRA since 2006. This is the government agency that oversees brokers. Who dropped the ball in terms of oversight? It’s a pity his clients weren’t aware Zemlock had no proper regulatory oversight.

It helps to know the differences between financial advisors. While brokers – who sell you investments, for a commission – fall under FINRA, another type, called a Registered Investment Advisor, has a different set of regulators. RIAs, who don’t sell securities and receive payment only from fees, are subject to the SEC or, if they manage less than $100 million, to state securities regulators. (My firm is an RIA.)

What can you do to make sure your advisor or your parents’ advisor doesn’t have his or her hand in your cookie jar?

1.  A recommendation from someone you trust isn’t enough. Research the individual or firm by going to regulatory agencies. The Securities and Exchange Commission’s website has a search function for individuals and firms.

2.  Check with voluntary agencies, such as the Certified Financial Board of Standards, if your advisor is a Certified Financial Planner practitioner. For CFPs, the board’s website lists suspensions or barred advisors, for life for various offenses.

3.  When thinking of hiring an RIA, make sure you receive a copy of the advisors’ compliance paperwork, called Form ADV. This document, filed with regulators, provides many details about the RIA, including any disciplinary problems.

4.  Where is your investment money held? Your account always should be visible 24/7 at a custodial institution such as TD Ameritrade, Fidelity Investments or Charles Schwab. If the firm holds your money, it’s a big warning sign. Bernard Madoff clients were easily duped in this way for years. Madoff was, in effect, his own custodian.

5.  If your elderly parents works with a financial advisor, is there another professional they trust – and have worked with – who can be a second set of eyes and receive duplicate statements? Perhaps their accountant or attorney. If that isn’t feasible, is your parent willing to have you or another relative receive duplicate financial statements?

Here’s a quick list of questions, which regulators suggest, to consider when interviewing a financial advisor:

·       What experience do you have, especially with people in my circumstances?

·       Where did you go to school? What is your recent employment history?

·       What licenses do you hold? Are you registered with the SEC, a state or FINRA?

·       Are the firm, the clearing firm and any other related companies that will do business with me members of the Securities Investor Protection Corp.? SIPC seeks to make investors whole if their brokerage fails and can’t reimburst them all their money.

·       What products and services do you offer?

·       Can you recommend only a limited number of products or services to me? If so, why?

·       How are you paid for your services? What is your usual hourly rate, flat fee or commission?

·       Has any government regulator ever disciplined you for unethical or improper conduct? Has a client, who was not happy with the work you did, ever sued you?

·       For registered investment advisers, will you send me a copy of both parts of your Form ADV? Note: a registered investment advisor is required to give you this disclosure document about the firm before or during your initial meeting. The first part is basic information on the RIA; the second deals with details such as fees, services provided, regulatory infractions.

Regulatory authorities are stretched in terms of monitoring financial advisors. Only additional vigilance on your part can lower the risk of meeting a rogue advisor who has no moral compass.

Follow AdviceIQ on Twitter at @adviceiq.

Eve Kaplan, CFP, is a fee-only advisor in Berkeley Heights, N.J. Kaplan Financial Advisors is a Registered Investment Advisor in New Jersey and New York. 
AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty. For instance, the rankings this week measure the number of clients whose income is between $250,000 and $500,000 with that advisor. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.