You might as well save the expressions of wide-eyed amazement as we once again discuss an investment professional who could star in any contemplated sequel to the film Dirty Rotten Scoundrels; sadly, the frequency with which this stuff is happening is more a prompt for yawning than it is one for an expression of outrage. Kenneth Starr, a New York-based investment adviser with celebrity clients that include Sylvester Stallone, Martin Scorsese, and Uma Thurman, has been charged by the U.S. government as being the architect of a $30 million fraud. The technical nature and details of the actual charges don’t really matter, at least in this forum; they’re all some version of the following: stealing money from the clients who put in Starr the greatest of trusts. What else do we really need to know, beyond that simple and painful fact?
It is wasted effort to go on about what a scumbag this guy is; we all know he’s exactly that, and he knows it, as well. The salient point I want to emphasize here is the common denominator…indeed the greatest ally…of thieving investment advisers is the fact that they are “self-clearing.” This is an industry term that basically means the adviser, in addition to being an adviser, is also the custodian of his clients’ monies. I have never seen a compelling reason for an adviser to also act as custodian. Whatever advantages there may be are strongly outweighed, in my opinion, by the potential lack of transparency, and by consequence, the potential for misdeeds by the adviser.
If you are in the market for an investment adviser, fine; an adviser can be a great asset to a client who has not the time, inclination, and/or expertise to properly manage his own portfolio. However, do yourself a favor and stick with an adviser who utilizes a third-party independent custodian as the depository of the actual funds; in this scenario, the adviser is merely attached to the account in a capacity that allows him to manage your funds with a limited trading authorization. This independent custodian could be a mutual fund company, or a discount brokerage, or any such place over which the adviser has no control and that generates statements and trade confirmations directly to you and separate from the purview of the adviser. The best independent custodians, from the standpoint of your own protection, are those that have well-known names and are high-profile players in the investment business: discount brokerages like Schwab and TD Ameritrade are good examples, as is any of a variety of mutual fund families. There are plenty more beyond those, but the point is that if you are writing a check to your adviser or the company he owns, rather than to an independent custodian, you are increasing the chances that the troubles now plaguing the clients of Kenneth Starr will befall you, as well.
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Bob Yetman, Editor-at-Large at Christian Money.com (www.christianmoney.com), is an author of a variety of materials on personal finance and investing, as well as on topics of fitness and self defense, to include the recently-released book Investor's Passport to Hedge Fund Profits (John Wiley & Sons, Inc; www.investorspassport.com) and the new unarmed combat training DVD Thunderstrikes – How to Develop One Shot, One Kill Striking Power (Paladin Press; www.mikereevesonline.com).