by Jack Waymire
Investors should pay more attention to who has physical possession of their assets, see Madoff Case Puts Focus on Duties of Custodial Banks. This is the role of a custodian and not financial advisory firms or their representatives. In fact, based on regulations, financial advisors and their firms are prohibited from coming in contact with their clients assets – except their fees. This creates the need for a custodian to take physical possession of assets, process trades, collect dividends and interest, and produce monthly custodial reports that are also called brokerage statements.
Due to the important role of custodians investors should limit their selection of financial advisors and stockbrokers to professionals and firms that use the services of brand name third party custodians such as Charles Schwab, Fidelity, Pershing, and TD Ameritrade. Or, limit their selection of firms that have in-house custodial services to brand name firms. A brand name firm will be responsible for hundreds of billions of dollars and have a long, clean history of providing this type of service to hundreds of thousands or millions of investors.
Madoff used a small, inexperienced custodian to steal from investors. This should have been a major red flag for more sophisticated investors – why did he pick this particular custodian just like he picked the small Long Island CPA firm to audit his accounts? He selected service providers that were easy to control and manipulate. Investors should learn from this debacle and automatically reject small custodians that are recommended to them. Why take this risk when they don’t have to? Perhaps if Madoff victims required a brand name custodian he would have turned down the accounts to avoid scrutiny and his victims would still have their assets.
Based on the court documents it sounds like investors and their advisors should require custodians to disclose exactly what they are and are not accountable for. Advisors should provide this document to investors so they have reasonable expectations about the services of the custodians. They have a right to this information because they pay significant fees to the custodians. Investors may be surprised by what the custodians are not accountable for. This is called full transparency and investors should not do business with organizations and advisors who do not practice it.
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