Asking About Your Assets

By Anthony Glomski

So you sold your technology startup or enjoyed some other event that produced a lot of liquid assets (cash). Now you’ve got excess money to put to work or just enjoy, and engage a financial advisor to help you. But how do you keep your money safe? By asking your advisor some hard questions up front.

The meltdown of 2008 taught us to cautiously question the safety and security of our money, whether investing in stocks, funds or our own business. “It’s only when the tide goes out you know who’s swimming naked,” said investing guru Warren Buffet.

Positive cash flows into investments and rising asset prices lull us naked swimmers when the market is high or rising. The tide must eventually go out; the market doesn’t rise indefinitely. That’s when you likely discover who’s been handling investor money dishonestly.

Most infamously, Bernie Madoff’s Ponzi scheme — revealed during the economic crisis — defrauded thousands of unsuspecting investors out of as much as $60 billion. Madoff received 150 years in prison, the maximum sentence allowed. Although the largest Ponzi scheme in history (promising big payoff for little risk), it was only one of many exposed during the Wall Street meltdown.

And if you’re in the middle of a once-in-a-lifetime liquidity windfall, protecting your money becomes even more important. Ask your advisor:

1. Do you have custody of my assets? Custody implies control. Your advisor may maintain discretionary authority to direct investments. For necessary protection, arrange for a third-party custodian to hold your assets.
Why? Imagine you own a coffee shop. You hire hard-working and reliable staffers who every day serve hundreds of people. Do you the owner feel better if: The barista makes change out of her pocket; or cashiers input every order into the cash register before a cup of joe goes out the door? In this example, the cash register acts as custodian: an independent depository and accounting system with safeguards that protect you.

2. Who’s your third-party custodian? Examples that advisors often use include Charles Schwab, Fidelity, First Clearing and TD Ameritrade. You need to be able to reach this custodian via phone, email and the Internet, without the intervention of your advisor.

3. Does this custodian provide statements independent of your advisor’s firm? Your custodian ought to generate reports and statements separate from your advisor, providing full transparency and assurance that your money is where it’s supposed to be. These statements should come directly to you.

For example, I work with an advisory firm for my investments. In addition to its quarterly reports, I get a statement from Schwab showing me in detail all my transactions, holdings and balances. I can also log in to Schwab any time and see what’s going on with my money. I don’t rely on my advisor to act as the gatekeeper to this information.

4. Will any of the investments that you make result in another advisor having custody of my assets? Sometimes advisors you work with place your money with other advisors who may have custody. Unfortunately, this is how a lot of people unknowingly get into trouble. Asking the question upfront can head off negative surprises later.

What if your advisor or another advisor that he or she recommends has custody? Does this mean a Ponzi? Not necessarily, but it does mean you need to do some research to cover yourself.

I’d suggest that you include your certified public accountant in this discussion. If any advisor acts as custodian of your funds, auditing becomes paramount. A nationally recognized accounting firm such as KPMG, PricewaterhouseCoopers, Deloitte or Ernst & Young should audit that advisor.

Sad to say, you’ll likely encounter at least one investment opportunity in the next 12 months that lacks appropriate controls.

If you do, demand transparency concerning where your money goes and where it’s invested, and receive independent statements verifying this information.

If those questions provide answers that aren’t to your satisfaction, raise the red flags. At that point, if you want to keep your money safe and your bathing suit on, run for the nearest exit.

Anthony Glomski is the founder of AG Asset Advisory, an SEC-Registered Investment Advisory firm in Los Angeles that works with a select group of successful business owners and tech entrepreneurs approaching a liquidity event to help them make smart decisions with their money.

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