This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Wednesday, March 10, 2010

Looking Out for #1

Over the last couple weeks the activity in the markets has dried up significantly. With no real economic news to speak of nothing is moving much lately. From stocks to commodities to interest rates, there’s just nothing doing in the markets.

We’d like to take this opportunity presented as a lull in market activity to discuss another area in the realm of investing, of which investors need to much more conscious. The issue is one where investors simply can’t be too careful, and that is having an advisor you can trust.

In today’s world, big government is present in nearly every aspect of our lives; from using cell phones while driving to chastising automakers for sticky gas petals. In these areas, as well as, if not especially, financial services, people are lulled into a false sense of security by [admittedly burdensome] regulation.

However, in a world where calls are regularly seen in the media for increased regulation on this product or that from one regulatory body or another, few realize just how many hoops we in the financial industry have to jump through before we ever sell a single share of stock.

Any new broker joining the financial industry (any college seniors should take note) is required to go through several background checks, including criminal checks where certain crimes (e.g. DUI) can disqualify a potential broker from the financial industry for ten years or more.

After the checks for criminal records, employment history is reviewed. Any candidate left standing is fingerprinted and handed 1200 pages in study material for tests they need to pass to complete their ‘registration.’

Now, some brokers pass all their checks, go through the fingerprinting and the testing, just to screw up sometime after. Unfortunately for them (or fortunately for investors), they’re hardly off the hook. All employment/criminal/residency/registration information is required to be updated at least annually, and a professional can still be banned or censured from the industry, sometimes for the rest of their lives.

What few investors realize is that, despite this very detailed, involved process by which financial professionals must enter their industry, regulators provide a much great perception of security than actual security (just like TSA). The real goal of regulators is to allow investors to feel safe so that markets can continue to function properly.

Let’s equate the role of regulators to the policemen of the financial world. When was the last time you heard of a police officer arresting someone before they broke into someone’s car, or kidnapped or murdered someone? They don’t. The role of the police is to show up after and figure out who to prosecute. The same is true of financial regulators: They can’t prevent crime; their best hope is to catch it early on and help clean up the mess.

Bernie Madoff and R. Allen Stanford, two of the biggest financial frauds in the history of finance, both went unnoticed for years by regulators, continually coming up clean on audits. Smaller, more local examples abound as well. In Northwest Ohio there was Continental Capital, who received a clean bill of financial health from the NASD (now FINRA) just months before it blew up.

Similarly, Bravata Financial Group, headquartered in Southeast Michigan with offices all across the Midwest, operated an illegal securities business – and a Ponzi scheme – for years before they finally blew up. In both of these [smaller] cases, more than a few clients lost a significant portion of their life savings in that debacle.

The bottom line, the real lesson here, is that investors need to quit relying on FINRA, the SEC, and other regulators to protect them. Consider this the golden rule (the rule to live by if you want to keep your gold!): KNOW THY BROKER.

Just as good brokers should want to know their clients, good clients should want to know their brokers. Know not just their character, but their system. Knowing what to look for will help protect your assets more than any regulator ever could. Though they’ve been discussed in greater detail in previous articles, here again is the unabridged version:

1. Know who serves as the custodian for your account. This is the party that actually holds the cash or securities in your name.

2. Is it possible for your broker to get his hands on your money? An advisor may be able to deduct their fees from your account, for both your convenience and their security of payment. However, if they can get their paws on any more than that you’re just asking for trouble.

3. Who’s verifying the amount of funds/securities in your account, and are they a credible source? Clients of Bernie Madoff received their statements complete with a list of holdings and return information, etc, without any outside verification. It hardly seems smart to repeat the mistakes they’ve already paid to learn.


Protection yourself and your assets from fraud is hardly as difficult as many might think. In today’s world we all need to be a little skeptical and any good broker will understand your inquiries into their way of doing business. Don’t be afraid to ask these questions. You have much more to fear by not asking, and finding out down the road that you should have.

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