Investors can Avoid the Next Madoff, According to Financial Advisor Todd Kernaghan

The story of Bernard Madoff, the former financier convicted of defrauding clients of billions of dollars, has raised fears in the minds of many investors. Todd Kernaghan, a noted financial advisor, offers tips to help investors avoid getting caught in a scam.

Austin, TX (PRWEB) July 12, 2009 -- It's an investor's worst nightmare: Losing a life's savings to the lies of a trusted financial advisor.

The story of former financier Bernard Madoff has intensified those fears in the minds of many investors. Madoff recently was sentenced to 150 years in prison for defrauding clients of billions of dollars.

Investors can take steps to avoid getting caught in a scam, according to noted financial advisor Todd Kernaghan in his blog at http://www.toddkernaghan.com/.

"Unfortunately, there probably will be another Madoff, and nothing is foolproof," Kernaghan writes. "There are, however, some steps you can take as precautions."

The first question investors should ask is whether the advisor, advisor's firm or an affiliate of either also acts as custodian of the funds.

If the answer is yes, investors should think twice, according to Kerhaghan.

"Most frauds are perpetrated when the individual has custody of the funds directly or through an affiliate," Kernaghan says.

Kernaghan recommends getting an independent custodian for the funds. A company with another name isn't enough -- an independent custodian should not be directly or indirectly controlled by the advisor or the advisor's firm. If the advisor refuses to use an independent custodian, investors should get a very detailed reason why.

Next, investors should know whether the advisor, advisor's firm or an affiliate prepares all statements of account activity.

If yes, it's not automatically a red flag. Many advisors suppress the statements from the custodian. If this is the case, investors should ask to receive the custodian's statements as well. If investors are not allowed to receive them, they should ask why.

"There are a lot of investment advisors out there that do use independent custodians and allow them to create the account activity statements, so you do not have to settle for one that doesn't," according to Kernaghan.

Third, investors should ask whether the advisor, advisor's firm or an affiliate of the advisor has the ability to withdraw funds for any reason other than the advisory and investment fee they may be entitled to.

If so, investors should find out under what circumstances they are allowed to withdraw funds and whether those circumstances require the investor's consent, according to Kernaghan.

Other than the ability to withdraw funds for mutually agreed upon advisory and investment fees for the account, all others should require formal consent. Investors should read their advisory agreements and make sure that is the case, according to Kernaghan.

Fourth, are the results (accounts) of the advisor audited in-house or by an affiliated company?

Most reputable investment advisors and firms hire independent auditors for results verification, according to Kernaghan. Investors should insist on a well known, independent auditing company that uses the latest standards.

Finally, investors should study the returns in their accounts. Are the returns consistent from month to month and year to year, do they have no losses, or do they appear to be out of the norm? If so, and particularly if any of the previous four answers are yes, investors should do some digging, according to Kernaghan.

For more investing advice from Todd Kernaghan, click on http://www.toddkernaghan.com.

Securities offered through PlanMember Securities Corporation (Member FINRA/SIPC). Advisory services offered through PlanMember Securities Corporation and USA Wealth Management. PlanMember Securities Corporation and USA Wealth Management are independently owned and operated. The opinions expressed herein are those of the writer, Todd Kernaghan, and not necessarily that of the above noted companies. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted.

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