GUEST AUTHOR BLOG: by Norb Vonnegut author of of "The Trust."
When I worked at Morgan Stanley, my team managed $2 billion in assets. I observed all the glitz of big money. But more importantly, I witnessed behavior across a broad range of Wall Street's different businesses—from guys trading derivatives to investment bankers cooking up the toxic securities we read about in the financial press.
My fiction dances close to the truth at times, probably because I use it to ponder big-picture questions born from my experience in the trenches of private wealth management.
There's one question, in particular, that keeps me up at night:
Why don't wealth management firms do more to protect families from financial predators?
Think about your experience with money managers. I'm willing to bet your accounts require Byzantine eight-digit passwords—an unwieldy mix of small and capital letters, numbers, and symbols that prevent both computer hackers and you from accessing your financial information. As we learned from Bernie Madoff, however, password machinations don't shield you from every kind of crook.
What would you do if a drug lord tried to infiltrate your family's finances?
Yikes. You might be asking yourself, Where did that come from? Well, actually, the question traces back to something that happened during my time at Morgan Stanley. A man called one of my partners and said he wanted to open a $50 million account. "More to follow if you do a good job."
Nobody in the brokerage business ever gets a call like that from a legitimate source. Stockbrokers chase money. Not the other way around. The prospect was roughly the same age as one of my partners, and they went to the same business school a few years apart. Promising! But the two didn't know anyone in common. Something didn't smell right.
We submitted the man's name to our legal department—in those days I regarded Morgan Stanley as a law firm with a very large financial subsidiary—and sure enough our $50 million prospect was on the bad guy's list. He was Pablo Escobar's first cousin, knee-deep in the family's drug business. Needless to say, we cut off all contact.
Fine, my team avoided a problem because Morgan Stanley had a ready line of defense. As a rule, however, families don't employ legions of lawyers to shut down the bad guys—and the more sophisticated the criminal, the better they are at eluding Google and the other tools of amateur sleuths. It stands to reason that financial predators will identify and attack more vulnerable targets.
I explore this issue in "The Trust." My novel is about a fictitious organization based in Charleston, SC, the Palmetto Foundation. It's similar to the large family foundations that some of my former clients maintained, which did plenty of good work but always ran on shoestring budgets. No lawyers. No compliance departments. No lists of bad guys. Family foundations, I thought, might be the perfect vehicles for laundering money.
I'm sure "The Trust" will alarm many who work in the not-for-profit sector or have close ties to philanthropic organizations. But you don't need to be charitable to be a target. All you need are money and weak defenses.
What can HNW families do to protect themselves from financial predators?
PLANNING YOUR "OPERATIONAL SECURITY'
I discussed this question with L. Burke Files of Financial Examinations & Evaluations, Inc., a firm that specializes in fraud prevention for both companies and individual investors. He said HNW families need more than attorneys, accountants, and money managers to protect their wealth. They require "operational security."
In other words, families need to develop the infrastructure to perform background checks on money managers, nannies, and anyone or anything that weaves into the fabric of their lives. It also helps, he added, to maintain an active defense against computer attacks—identity theft, reputational assaults, and whatever gets invented next.
As I think back to my days in wealth management, I realize that Burke is right. Money management is more than an asset allocation plan with all kinds of charts and diagrams illustrating the what-ifs of a market meltdown. It should also include a written game plan for keeping financial predators at bay. Problems, no matter where or how they originate, tend to feed on each other. Goldman Sachs , Morgan Stanley , and the other biggies should help clients shore up their defenses against fraud as a matter of standard operating procedure.
How can families shield themselves if they can't afford "operational security"?
Here are three quick pieces of advice that actually find their way into my novels:
1. Investigate your financial representative on BrokerCheck. It's a free online tool that shows whether stockbrokers have had problems with their clients or the SEC.
The service isn't perfect. You won't find everybody in the database. But BrokerCheck once saved a good friend from an investment scam orchestrated by his neighbor, a money manager he had known for twenty years.
Through a quick background check on the website, we learned that the SEC had disciplined the neighbor years ago for forging a colleague's signature. My friend passed on the deal, which was a good thing; he can still retire some day. The DOJ recently brought charges against the neighbor for running a Ponzi scheme.
2. Embrace Ronald Reagan's signature phrase—"trust but verify." If you're working with an independent money manager, insist on two sets of financial statements: one from the money manager and one from the custodian where your securities are actually held. Bernie Madoff duped his victims by controlling the information they saw. A third-party custodian can confirm the results your money manager is reporting.
3. Beware the "money porn." In my personal and professional experience, big lifestyles often hint that things aren't right. When I see outrageous spending, I sound the alert. Here's a riddle. What comes first? The predatory behavior or the over-the-top yacht?
Total disclosure: You won't find any checklists about money management in "The Trust." You'll just read about the travails of Grove O'Rourke, my fictional hero who gets sucked into a world of financial fraud and deception that he never sees coming.
Norb Vonnegutwrites thrillers and non-fiction about Wall Street behind closed doors. Norb built his wealth-management career with Morgan Stanley and other Wall Street institutions. A Harvard graduate, he splits his time between New York and Rhode Island and is a trustee with the American Foundation for the Blind. He is the author of "The Trust, "The Gods of Greenwich," and "Top Producer."