Got this question from a prospective new physician client recently: “You seem like a very nice person...but so did Bernie Madoff. Are there safeguards to prevent that type of thing from happening to me if I turn over control of my investments to you?” In the age of Ponzi schemes and shows like American Greed on TV (great show by the way...you’ll see how stupid investors can be and how many bizarre ways financial advisors can steal your money), I get that question every now and then. Especially since some physicians are skeptical about how I can go from practicing medicine full time to becoming a personal financial trainer for physicians and managing their investment portfolios and finances. So let me set the record straight. That physician’s first statement is definitely right...I AM a nice person! Except to the physicians who have no motivation to take any action with their finances and investments and who waste my time. For example -- whining and sobbing about your situation during your initial financial consultation with me (
/second-opinion-consultation/) and then complaining about how you have to pay a fee if you want to work with me. To those cheap doctors, I’m not a pleasant guy and have no desire to work with them.
On to the meat of the discussion. The basic way Bernie Madoff stole money is that he took custody of his clients assets. Here’s how that works. Suppose I’m uncle Bernie, and you hire me as your financial advisor. You then hand me a check for $100,000 or $1 million or whatever amount and the check is made payable to “Setu Mazumdar.” I then deposit your check in my personal account and tell you that I’m going to invest that money. I also tell you that I’ve created a separate account that belongs to you -- even though no such account actually exists. Then every month I concoct statements showing you the value of your account, the investments in your account, and your rate of return. In reality if I’m uncle Bernie, I’ll deposit your money in my personal account and then I’ll spend that money on whatever I want because there isn’t any account that’s titled in your name. Which means the statements Bernie sends you are fake and the rate of return is made up out of thin air. In other words Bernie Madoff had the authority to make deposits and withdrawals out of clients accounts and send that money to himself (though in his case even those client accounts didn’t really exist). Contrast that with what I do for my clients. When a client hires me as their personal financial trainer and investment advisor (BTW if you’re serious about your finances and want to do the same, then click here:/second-opinion-consultation/), they sign a client agreement with me which spells out the terms of the relationship, the fee, and other legal/regulatory info.
We open accounts at a third party custodian -- for example Pershing (a very large institutional custodian), Fidelity, Schwab, or others.
The accounts are owned by YOU.
Not by me.
They are titled in YOUR name not mine.
They are real accounts at a real custodian.
And you have FULL control over the accounts.
I do NOT take custody or physical possession of any client accounts or funds.
I am PROHIBITED from depositing money or withdrawing money from your accounts.
The ONLY person who can deposit money or withdraw money from an account is YOU not me.
If I request a withdrawal of funds from a client account, the custodian will reject that request.
If you make a deposit -- for example you want to make a contribution to your SEP IRA -- you send that check directly to the custodian and the check is made payable to your account.
You CANNOT send money to me to make a deposit. It is prohibited.
The ONLY checks my clients send to me is the fee they pay me. It’s very clear cut.
So what can I do in your accounts?
I am allowed to buy and sell securities WITHIN your account but cannot put money in to your account or withdraw money out of your account.
This is the way it should work with any financial advisor you hire.
If it doesn’t, you should have alarm bells ringing in your head and you need to find out what’s gong on.
I hope this helps you if you’re working with an advisor. considering switching advisors, or want to work with an advisor for the first time.
If you want me to help you, then let’s talk. Just click here:
And yes I’ll be nice to you if you’re serious about getting your finances and investments in order. Otherwise don’t bother.
Talk to you again in a day or so.
Setu Mazumdar, MD, CFP®