The Daily Ticker Blog

Is Your Financial Adviser the Next Bernie Madoff?

Bernice Napach

Tuesday, Dec. 11, will be the fourth anniversary of the Bernie Madoff investor scandal — one of the biggest ponzi schemes in Wall Street history. Madoff was sentenced to 150 years in prison and will never touch investor money again. But what about all those other advisers out there? Can they be trusted with your money?

Nicholas Stuller, who runs AdviceIQ, a firm that evaluates advisers, tells The Daily Ticker that investors should trust but verify the records of investor advisers. Using the lessons learned from the Madoff debacle, Stuller suggests that investors ask the following questions before hiring an adviser:

  • Is the custodian who's holding your money the same person who's managing the assets? Stuller says that's not necessarily bad but it could be a signal to dig deeper.
  • Has the adviser made clear his or her investment philosophy? If advisers can't specify their investment philosophy, or if they cloud the issue by using insider jargon, consider those red flags.
  • Does the adviser use an independent, reputable accountant?

"You have to keep asking questions," says Stuller. AdviceIQ lists advisers that pass its proprietary due diligence. Any infraction — from a securities fine to a non-work related arrest — is enough for AdviceIQ to exclude that adviser from its list.

Related: Convicted Executives: Where Are They Now?

Stuller also suggests that investors call the 800 number listed on their statements to independently verify the custodian's number and make sure the statement they received is legitimate.

"The vast majority of advisers are perfectly clean," says Stuller. "Only 7 percent of advisers have any kind of disciplinary history. … But the person who will most likely take you is incredibly bright ... and will go to extreme lengths to fake you out."

Stuller also advises that investors shop around, meeting with lots of advisors before choosing one.

"Find advisers that have clients like you," says Stuller. "That adviser will have affinity for you."

How advisers are paid also varies. Some advisers get paid a commission per transaction. Others charge a flat annual retainer or percent of assets. Any of these advisers may also charge an additional fee to create a financial plan. There are pros and cons to each. Whatever route you choose, just make sure you do your homework.