Who Has Your Money? A Madoff Lesson...

While certainly the whole world was shocked by the revelations of Bernie Madoff's misadventures, those of us in the world of independent registered investment advisors were particularly stunned. Stunned that people would allow the party making the investment decisions, and providing reports to clients, to also hold custody of the investment assets themselves.

When folks come in to talk to us about opening an account, they sometimes (but not always) ask a key question: "Why would I hand my money over to a small firm like yours?" Our answer is simple:

"You shouldn't!"

Safe and prudent money husbandry requires a division of duties. The party making the decisions is different from the party tallying and accounting for those decisions. A CPA cannot both compile a company's financial statements and have signing authority on their checking account. Who's going to know if the CPA is doing someting nefarious?

Likewise, the investment advisor can never have the ability to be the sole source of information about a client's assets. Our clients' investment assets are held at Schwab and Fidelity. That way, those companies will send monthly statements directly to the client. Firms like ours are then prevented from being in a position to falsify statements about what a client actually owns.

We also advise two private partnerships in which our clients invest. The assets of those partnerships are held and controlled by an independent manager; the financials are compiled by independent accountants. We do not have signing authority on the checking accounts and cannot otherwise obtain and transfer any assets.

Bernie Madoff's clients made the fatal error of trusting both custody and reporting to the same party. Whether our clients realize it or not, we have set up our business so that a client cannot make that same error.