Hi All,
So supposedly having a custodian helps protect me against the broker “stealing” my assets. Now exactly how does this work, I only deal with the broker and they get my instructions online, only they get to deal with the custodian.
Could not the broker simply instruct the custodian to transfer the assets anywhere they wish, and the broker can close up shop? How does the custodian know that I approved the transaction?
Thanks
Make sure your account is insured by the SIPC, which it is if it is legit. And if you have more than $500k in the account make sure the broker-dealer carries additional protection. Lloyd’s of London is the typical provider. Typical limits are $30MM per account and $150MM in aggregate.
I feel like if you have to ask this question, you (a) have a serious paranoia disorder or (b) are at the wrong broker.
Well, Madoff’s clients should have asked. Wrong broker certainly. But, the clients knew he was crooked and didn’t care. They just thought he was robbing someone else to get the returns.
Usually the Advisor would review how your assets are protected during account opening (signing up). They should tell you who their regulator is, why they are collecting your personal information (on the acct opening docs…), fee schedules, cost of service and if they have any other outside business activities. (for example, if they hold an insurance license or do tax prep).
My account is SIPC insured, and I don’t have much of a concern as my broker is one of the biggest. Brokers always stress that they don’t hold the assets and they show they have a reputable custodian and I am just trying to understand does that really matter. If the custodian takes instructions from the broker and not from me, I am still exposed to the brokers risk.
I also would not like to get to a situation where I need the SIPC coverage, I am sure that process can take years during which I might wish to sell some holdings…
^Ok good.
Did you check to see that your broker is registered? (I’m not sure how to do this in the U.S). You could also find out if the broker has had any formal complaints filed, discplinary actions etc with the regulators.
I’m curious as to the reason(s) why you are concerned that that broker would steal your assets? (I’m an Advisor and I’m always interested in trying to understand what investors are thinking).
“Qualified custodians can be banks, registered broker-dealers, futures commission merchants, or certain foreign entities.” Your broker-dealer is probably the custodian of the account as well. Yes, they can steal your money if they have custody. That’s why your account is insured. An advisor cannot if they only have discretion. Well, it would be difficult. If Bernie was only given discretion, we wouldn’t know his name. His accounts were not insured beyond the 500k given by the SIPC. His clients were brain dead and/or chose to turn a blind eye.
Brokers and custodians have many rules in place to protect clients and their assets. For example, if a client wants to add banking information onto their account this task would need to be completed and verified by a third party in compliance at head office who would verify the printed name on the cheque (and address) matches the client. Another example: if you wanted to redeem investments from an account and make the cheque payable to a third party, as the client you would need to sign a form in order to have the request processed.
It’s typically very difficult to commit this type of fraud unless the person is responsible for both custodian and broker duties or if the persons responsible collude. But there are typically a threeway reconciliation that should be done at least monthly to make sure no assets are misplaced.
My broker does its own prop trading, and you wonder if one day they faced losses and decided maybe we will tap client assets to make some money and cover our losses, and then they lose my assets.
My custodian and broker are related entities, so I guess they could collude…
But even if they were not related, since the custodian takes instructions from the brokers and not from me, cant they ask them to transfer asset X to person Y…
BR
Why don’t you ask them if they tap client assets to make money? (I’m guessing that it would be violating about a dozen securities rules; but again I’m not familiar with US securities law).