Financial advisors are buzzing about the SEC’s announcement of its $30 million fraud case against New York-based “advisor to the stars” Kenneth Ira Starr, and a lot of what they’re saying goes to the heart of current issues such as fiduciary duty, transparency and custody rules.
When asked what advisors should tell their clients in the wake of the fallen Starr, brokers, RIAs, and lawyers interviewed by InvestmentAdvisor.com all pointed to the importance of using cold, hard facts to reassure clients about the safety of their assets.
“They should tell their clients that they’re using a third-party custodian,” said Susan John, chair-elect of the National Association of Personal Financial Advisors (NAPFA). “They should tell them to review the statements they receive from their third-party custodian against the statement they receive from their advisor.”
John added that if clients are anticipating purchase of a security that’s not publicly traded, they should both review and understand the offering documents with their advisor before committing to a purchase. “And it would also be a good idea to have a third party such as their tax advisor or an attorney review.
According to the SEC charges, Starr pulled the wool over his clients’ eyes by arranging many limited partnerships for a small pool of “qualified” investors, an arrangement that allowed him to hide his financial dealings. The SEC charged Starr on May 27 with fraud and sought an emergency court order to freeze his assets after he allegedly stole $7 million in client money to buy a multimillion-dollar apartment.
“The concerns that clients have are, ‘Are my assets safe?’” said Thomas Giachetti, a Stark & Stark attorney who serves as chair of the Princeton law firm’s securities group and is a NASD registered representative and former investment banker. “It’s very simple. All clients that have accounts at major custodians have signed an agreement, and the advisor’s written disclosure agreement should make clear that it does not maintain physical custody of the assets, but rather that they are maintained at the designated qualified custodian. And last, each client generally has direct electronic access to their account at the qualified custodian and should receive a monthly or quarterly statement directly from the custodian confirming the integrity and market value of the assets.”