Beware the dark side

Steve Merrell |

In my desk I keep a file folder provocatively titled “The Dark Side.” In this file I keep news clippings of some of the more notorious investment frauds that have rocked the Monterey Peninsula in the past twenty years. Unfortunately, we have seen some doozies. Remember Cedar Funding, the real estate-based Ponzi scheme that defrauded investors of more than $150 million? Or how about Jay Zubick, the supposed investment mastermind who ripped off his “closest friends” for more than $14 million?

The plain truth is that most fraud is avoidable. If investors were careful, most fraudsters would be out of business long before they could inflict damage. Here are six simple things you can do to protect yourself.


1. Always use an independent custodian. The custodian is a financial institution like a brokerage firm or a bank that holds your securities for safekeeping to prevent them from being lost or stolen. Institutional money managers always use custodians to provide the necessary financial controls over their assets.

One of the custodian’s main functions is to report independently to you about everything that happens in your account. These reports take the form of monthly account statements and trade confirmations. Custodian reports are especially important if you give your financial advisor discretion, or the ability to make trades in your account without prior authorization.

2. Never let your advisor get between you and your custodian. You need to receive your statements directly from the custodian.

Jay Zubick defrauded his investors by putting himself between the custodian and his clients. Investors relied on Zubick to tell them how their investments were doing and he simply lied to them. He could never have gotten away with his fraud had his investors been careful about using an independent custodian and receiving their reports directly from the custodian.

3. Be careful about maintaining the integrity of the custodial relationship. For example, if you allow your advisor to list herself as a joint owner, beneficiary or trustee on your account, you have given her legal claim on those assets and authority over how they are handled. Similar problems can occur if your advisor asks you to sign a blank form. A signed blank form can be repurposed to do things you might never anticipate.

4. Never write a check made payable to your advisor, unless it is for your advisory fee. If your advisor is trying to help you deposit money into your account, your check should be made payable to the custodian on that account.

5. Never give your advisor the password to your account unless it is a password that grants informational access only. If you give your advisor full access to your account, including authority to withdraw or transfer funds, then she automatically has custody over that account and you are vulnerable to fraud.

6. Never lend money to your advisor. While this may not cause a breach of custody, it certainly crosses the boundaries of professional propriety. Just don’t do it.


Reputable financial advisors understand the vital role that independent custodians play in safeguarding their client relationships. In fact, most reputable advisors actively avoid taking custody because it imposes onerous compliance burdens on the advisor. If you question whether you are currently protected by an independent custodian, ask your advisor to explain how your assets are custodied. You may even want to get a second opinion. If you discover that your advisor has custody of your assets, find another advisor—and fast!



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them