Five Steps To Avoid Investment Advisor Fraud

Five Steps To Avoid Investment Advisor Fraud

This blog was prompted by an article in the SJ Mercury News reporting that Jake Peavy, the San Francisco Giants pitcher, had been defrauded out of more than $15M by Ash Narayan, a financial advisor with RGT Capital Management in Irvine, CA. According to the SEC lawsuit, Narayan had fraudulently shifted $33M from client accounts to a startup called The Ticket Reserve (TTR), a company in which, unbeknownst to his clients, Narayan had a major personal financial interest.  He allegedly forged client signatures to enable the transfers in order to prop up TTR’s income statement.  At present, Narayan’s accounts have been frozen and he has been fired from RGT.  But it’s unlikely Peavy will get back much (if any) of the money Narayan had been managing for him.

There are a number of prudent steps you can (and should) take to avoid having this happen to you. Unfortunately, each of these individually may not help in all situations.  For example, I usually recommend getting advice only from Certified Financial Planners (CFPs).  But Narayan was in fact a CFP (much to my and probably the CFP Board’s chagrin).  Nonetheless, if you make it standard practice to follow all five recommendations, the likelihood of being defrauded will become extremely small.

  1. Make sure your assets are held by a custodian who is independent of your advisor.  That way you can independently verify your holdings and their value. If investors in Bernie Madoff’s funds had taken this step they would never have invested with him in the first place. But this would not have helped weed out crooked advisors such as Narayan, since according to RGT’s ADV Part 2, the firm does utilize an independent custodian. (The ADV Part 2 does not name the custodian).
  2. Read your investment statement regularly. Although Narayan effectively stole money from his clients to fund TRT, the custodian holding their assets should have reported the cash transfers in the clients’ monthly statements. But unless you notice such transfers and question them, custodians have no reason to assume there’s anything wrong.
  3. Avoid financial advisors who practice discretionary investing. That means you are giving them authority to make trades for you without telling you in advance what they are going to do. That’s certainly a convenience for busy investors who trust their advisors to do the right thing. However, with a non-discretionary advisor you will additionally have the opportunity to review and approve (or not) any investments before action is taken. That’s a valuable check on your advisor’s decision-making. And most such advisors make it easy for you to provide such approval. Even if you’re busy it shouldn’t take much more of your time.
  4. Make sure your advisor does not have any outside business interests. I’m not talking about board membership in nonprofits or other community service activities, but rather ownership or interest in outside for-profit companies that provide the advisor with additional income or equity. Advisors are required to disclose such business activities, but Narayan evidently failed to do so (which is an additional violation). Even putting aside the obvious potential for conflicts of interest, you should be concerned about the time your advisor spends on his/her other money-making activities. If nothing else, that leaves less time for him/her to spend on clients.
  5. Don’t put all your eggs into one basket. Even if your most trusted friend suggests an investment, common sense dictates that you not risk all your money on that one bet. Your portfolio should not only be well-diversified, but I recommend not putting more than 10% into any non-publicly traded investment. This step will not help you avoid blatant fraud (such as having your signature forged), but will help you minimize the damage from that “sure thing” that a less scrupulous advisor might be promoting.

I’ve felt obligated to write on this topic too many times in the past. Crooked or even just plain unethical financial advisors can seriously hurt their clients.  As much as you like and trust your advisor, if you follow the simple steps above, you are likely to either prevent or at least catch any problems that might occur.


One Response

  1. Michael Gray says:

    A great article! Some very helpful tips.

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