Stories about advisors cheating their clients are far from rare, and therefore, advisors must do a better job at educating and appeasing concerns, says Daniel Bernstein, director of research and development of MarketCounsel, a so-called advisor for advisors.

A healthy dose of skepticism among clients is natural and healthy, says Bernstein.

What's important, Bernstein says, is that advisors know how to talk about investor fears. “That mistrust can be a good thing for advisors that don’t have self-custody assets ... It allows advisors to differentiate themselves from many of the firms where frauds occurred,” Bernstein adds.

Amid ongoing news about investor scams, advisors need to face two questions: What are financial advisors doing to rebuild trust with clients, who may be more and more tempted to use the ETrade and Fidelitys of the world and avoid the advisor altogether? And what are financial advisory firms doing to implement better safeguards to prevent such crimes from happening in the first place?


The Bernie Madoff case may be old news by now, but stories about investor scams keep on coming. In late March, the Securities and Exchange Commission announced an asset freeze against a Massachusetts-based investment advisor charged with stealing money from clients who were given the false impression they were investing in a hedge fund. The SEC alleged that Gregg Caplitz and Insight Onsite Strategic Management in Wilmington, Mass., stole at least $1.1 million from clients and used it for personal expenses.

In another recent case, a financial planner who worked for both Northwestern Mutual and One America - American United Life selling investments and insurance products was sentenced in September to prison in a case linked to identity theft. Andrew Myers "abused his position as a financial planner to steal personal identifying information from the client files of approximately 3,000 individuals," the U.S. Attorney's Office said in an announcement of the verdict, with investigators noting that he used some of that personal information in an elaborate scheme to steal thousands of dollars.  

Myers did not use proprietary client information to cause financial damage to any of Northwestern Mutual's clients, says company spokeswoman Betsy Hoylman.

But cases like Myers' can threaten consumer trust. Hoylman says the firm is always focused on security measures. “We're constantly reviewing our safeguarding procedures -- so that we meet or exceed federal standards,” she says. "Even though situations like the one with Andrew Myers are extremely rare, our standards to safeguard clients always abide by that required by state law."


For advisors, communication is key, says Bernstein. He suggests advisors focus on custody issues: “It’s important for advisors to educate clients about who holds their assets," he says. "Fee-based investment advisors do not generally have custody over any assets. It is significantly more difficult for this type of advisor to steal assets when they are held in the name of the client with an independent custodian that sends statements directly to the client."

Bernstein adds: “If your investor asks you, 'How do we know you’re not the next Madoff?,' tell them that Madoff had physical custody of client assets. He never even placed trades, but he created his own statements and there no checks and balances in place to stop him.”

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