Jan 11, 2023|Education- 5 min
But keeping our assets safe is just as important. Taking additional, needless risks with our hard-won gains makes no sense. Here we look at four ways you can minimize these risks.
When you graduate from a saving account in a bank to investing with a fund or advisor, you can easily lose sight of where your assets are held. If you do not know who controls your assets, you are open to fraud or other unwelcome surprises in an unexpected event (such as a market crash).
When you entrust your portfolio to an intermediary, that intermediary will (or should) entrust your funds to a qualified third party custodian, whose primary role is to keep the funds safe for you.
The fraudster Bernie Madoff self-custodied his clients’ assets—he kept them under his own control. This enabled him to bankroll an illegal investment scheme without scrutiny for many years.
Besides fraud, customer funds can be at risk without their knowledge. Some broker-dealer custodians do not fully segregate consumer funds but use them as collateral for other trades. This puts funds at risk if the institution runs into trouble.
Ensuring that your funds are segregated and in the hands of a large and reputable custodian gives you peace of mind. You can also ascertain additional information such as whether, and up to what amount, your money (if kept as a deposit) is insured against loss (a legal obligation for custodians in many countries).
Online transactions are convenient and cost-effective for investors and financial institutions alike. The pandemic accelerated the trend towards online banking and investing, as face-to-face interaction became either impractical or impossible.
Unfortunately, this has opened a new avenue for identity fraud. Scams and frauds focus on obtaining personal information and credentials (passphrases, birthdays, social security numbers) to gain access to funds online and withdraw money before the victim detects anything unusual.
Careless errors (such as leaving a password taped to a computer screen) can be avoided with common sense. But more sophisticated scams rely on impersonating a family member or a trusted institution (e.g. via an official-sounding call or email).
In case of being defrauded, you can still protect yourself by preparing a response plan (e.g. police report, locking your credit file). Your advisor and/ or bank can help you with this. As fraud continues to evolve, the best protection remains constant vigilance.
Fees are often less transparent than they should be. Some financial products are designed to be opaque, and a good financial advisor will help you avoid them.
Understanding fees can be a daunting task as there could be many different fees charged based on the services provided. Advisory fees are what an advisor will charge you for helping you build and maintain your investment strategy (including asset allocation, manager selections, etc.). Management fees relate to the ongoing management of underlying investments or assets (sourcing, evaluating, executing, monitoring, exiting). Performance fees are paid to the investment manager once the underlying investment meets or exceeds a minimum return per the private placement memorandum (PPM). Other small fees include custody fees, legal fees, and audit fees that are generally immaterial to the investment performance.
The complexity of these fees can vary widely depending on investments. Lower fees are not necessarily better, but lower complexity fees leave less room to hide. Your advisor should help you understand these fees. Transparency is practiced as one of the core values at The Family Office.
As your trusted advisor, The Family Office strives to place your investments with the best custodians with full transparency on fees, being always the trusted partner of our investors.
About David M. Darst, CFA
Since January 2017, David M. Darst, CFA has served as Senior Advisor and Investment Strategist of The Family Office in New York and Bahrain. In this role, he has significantly contributed to the formulation, communication, execution, and monitoring of the company’s asset allocation, investment strategy, and wealth management activities in the Gulf region, North America, Europe, and Asia.
Following a 25-year career with Goldman Sachs in Zurich and New York, David served for 17 years as a Managing Director and Chief Investment Strategist of Morgan Stanley Wealth Management. David was the founding President of the Morgan Stanley Investment Group, and has served for three years as CEO of Petiole Asset Management AG, the Zurich-based asset management arm of The Family Office.
David is the author of sixteen books, including The Complete Bond Book (McGraw-Hill), The Handbook of the Bond and Money Markets (McGraw-Hill), The Art of Asset Allocation, Second Edition (McGraw-Hill) and The Little Book that Saves Your Assets (John Wiley & Sons), which has been ranked on the bestseller lists of The New York Times and Bloomberg Business Week.
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