One of the oddities about the American financial marketplace is how so many consumers prefer to keep their assets at the large Wall Street firms—which famously have sales cultures driven by multi-million dollar bonuses to their brokerage sales agents, and whose BrokerCheck reports read more like rap sheets than profiles. (Don’t believe us? Type a famous brokerage firm name into the second box in the BrokerCheck website, and you’ll get hundreds of thousands of listings of specific broker transgressions, fines, and examples where customers received arbitration awards after various kinds of financial abuse.)
The reason, of course, is that many people feel safer keeping their assets at a very large firm that they’ve heard of, rather than a smaller financial planning firm, even if that smaller firm often provides more customized service and has renounced predatory sales activities and commissions. But the interesting thing is that this may be a false comfort; the funds may actually be safer with the smaller planning office than with the larger multinational firm that buys Super Bowl advertisements.
How can that be? Under the rather stringent regulations imposed by the U.S. financial system, financial planning firms and investment advisory offices must custody client assets with a custodian—meaning that the actual investments and money is housed, not in the basement of the advisory firm or in its computer system, but, most often, at a large financial firm whose sole purpose is to safeguard the money, keep close track of it, and provide statements directly to clients showing that the money is where it is supposed to be. Having custody at one of the institutions is a very strong check-and-balance that is embraced and supported by the smaller financial planning offices. The planning or advisory firm doesn’t ever have direct access to your money, and therefore would be unable to take it out or otherwise steal or misplace it.
Who are these custodians? The largest and most commonly used include Bank of NY/Mellon/Pershing, TD Ameritrade Institutional, Charles Schwab & Co., and Fidelity, each of which has between $500 billion and $1.5 trillion in advisor assets under custody. In contrast with the large Wall Street firms, which have been accused of defrauding customers and routinely appear in the news for regulatory fines, you can Google “examples of institutional custodians losing client money,” and see that there no examples, famous or infamous, large or small, of this important check-and-balance failing retail clients.
Does that mean you’re completely safe no matter who you work with? Of course not. The Bernie Madoff Ponzi scheme looked legitimate, but managed to evade this important check and balance by having a small company controlled by Bernie himself serve as the custodian. (Madoff could—and frequently did—take the money back out and put it in his pocket whenever he wanted.) The large Wall Street firms also serve as their own custodians.
Your safest avenue is to work with a financial planner or investment advisor who has a custodial relationship with a well-established institutional custodian, and you want to periodically check the statements sent by the custodian to make sure they match your advisor statements. Hundreds of thousands of clients can have their cake and eat it too: get better service AND enjoy improved safety of their assets.
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