Thursday, 15 March 2012

How to ensure you are not writing a check to a Madoff

As a tax advisor I often assist my clients with legacy planning.  However the most tax efficient structure is worthless if the financial advisor assisting with the planning is a Madoff impersonation.  I know I am hung up on Madoff and that now we have the flamboyant billionaire Mr. Allen Stanford of Texas, Mr. Kautilya Pruthi of London, England (  and in our own backyard Mr. Weizhen Tang of Toronto and Mr. Earl Jones of Montreal but humour me while I continue to lump them all as Madoff.

One of my questions as such is always to ask the advisor about the segregation of the funds – in other words – are the funds held by a third-party custodian?  Personally I like to see a large financial institution as custodian and safe guards in place so as to prevent the advisor from helping him or herself to the funds.  Safeguards such as not providing the advisor with the power to write a check or to move the funds from the institution.  Of course dear reader nothing is iron clad but this doesn’t mean that preventative measures should not be taken.  After all every little hurdle to prevent a new Madoff from rising is a good thing.  It was therefore with delight that I saw Rob Carrick’s article this morning in the Globe and Mail titled “How to spot a crooked adviser” see .  Rob consults with Stephen Horan, head of private wealth management at the Charlottesville, Virginia based Chartered Financial Analyst (CFA) Institute.  The tips offered by Stephen Horan and Rob are invaluable and include checking the advisor’s registration with the Ontario Securities Commission for Ontario based advisors and with the Canadian Securities Commission for all other advisors in Canada.  However I want to emphasize to the busy reader that merely checking the registry status of the advisor is not sufficient as Mr. Madoff in New York was audited several times by the security commission and passed with flying colours.

Update April 18, 2012

Even when a good advisor is found - one still needs to be  cautious.  The news today focussed on two Toronto investment advisors admitting to forging their client signatures for more than a decade.  No financial harm came to the clients of these investment advisors as the signatures were forged not for personal gain or for fraudulent purposes but merely to avoid the clients from the hassle of having to come to the offices of the investment advisors to sign.  I can only shudder - in this day and age to allow forgery of signatures is unthinkable.  A Madoff did not happen but could have easily.  The advisors will be able to serve their one year suspension in two six months stint as long at it completed by October 15, 2014 thereby allowing them to return to work.  Mr. Rotstein will  pay a $250,000 fine to the Investment industry Regulatory Organization of Canada (IIROC). Ms. Zackheim will pay a fine of $50,000, and the pair will also pay $10,000 in costs.

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