Financial advisors need to check the credentials of compliance officers before putting clients’ money into a fund or placing it with a money manager, said attorney Todd Cipperman, founding principal of Cipperman Compliance Services in Worth, Pa.
Cipperman, reacting to case in which the SEC sanctioned an investment manager and an unregistered investment advisory firm in two separate cases for luring investors into fraudulent schemes by falsely advertising high returns and false credentials, said advisors can take several steps to avoid investments with these types of people and funds.
Topping the list is to check the compliance officer of the fund or firm and make sure that person has experience in compliance and that he or she is devoted full-time to compliance issues rather than holding more than one job title, Cipperman said.
Check the history of the returns on the investments to determine if claims for high returns are justified over several years or if it is an aberration for one year, he said.
“Sometimes there is too much focus on performance and not enough on the operational aspects of the fund or manager. Advisors understand they can take market risk, but they do not want to take firm risk. You do not want to risk a firm collapsing,” he said.
If the fund or money manager is well known and handles large amounts of money, advisors should not assume other investors have checked them out. Do your own due diligence before investing clients’ money, he said.
If an advisor or investor becomes involved in a fraudulent situation, it is often difficult to exit the investment and retrieve the client's money, Cipperman warned.