It would be nice if Bernie Madoff's 150-year prison sentence would scare straight any financial adviser who ever thought of duping a client.
But that's not likely.
While most advisers are honest, there will always be some who will betray clients' trust for a quick buck - or billion.
Last year's stock market crash devastated portfolios, causing many investors to realize they could use the help of a professional. Unfortunately, it coincides with the Madoff scandal and other high-profile cases of suspected fraud. Investor distrust of advisers is likely higher than ever.
So, if you want to hire a financial adviser, how can you avoid a Bernie Madoff-type situation? There is no foolproof way to prevent fraud, particularly if you have someone determined to cheat. But by taking some simple steps, you can lessen your chance of being a victim, or at least reduce the damage from a fraud.
Trust, but verify
Madoff's crime is a case of affinity fraud, where many of the victims ran in his social circle and trusted him because of that.
You can still ask friends, family, co-workers or other professionals you work with for suggestions on financial advisers. But don't stop there. Once you get recommendations, dig into the advisers' backgrounds.
Start by checking their background, including disciplinary records and customer complaints, with regulators. Granted, the Securities and Exchange Commission dropped the ball when it came to Madoff, not heeding warnings about him for years. Still, records are worth checking.
Brokers are licensed by the Financial Industry Regulatory Authority, or FINRA. Investment advisers managing less than $25 million in assets are licensed by state regulators, while the SEC regulates those with more assets.
Records can overlap, so start with your state regulator. Marylanders can check on brokers and advisers by contacting the state Securities Division at 410-576-7048. The agency can provide more information than what's available through FINRA because of a broader state public information law, says Securities Commissioner Melanie Senter Lubin.
FINRA posts brokers' records online under BrokerCheck at finra.org. Even if there is no disciplinary blemish, be wary of a broker who switches firms every year, regulators say.
Understand, too, that investment advisers and brokers have different levels of responsibility to clients.
