Anti-Fraud Measures Your Practice Needs

A story from New York Times personal finance columnist Ron Lieber quickly traveled through the Twitter universe and landed in my inbox.  Lieber is a client of NAPFA-member AFW Wealth Advisors and was informed by the firm that one of their advisers, Matthew Weitzman, is under investigation for “certain irregularities in a limited number of client accounts.”

See the NYTimes article here.

Also, see coverage from Roger at The Passionate Planner and Andrew Gluck at Advisor Blog Central.

Let’s face it. Your clients may very likely see this article. Once they do, they’re going to ask you what you are doing to protect their accounts from this kind of fraud.

How Advisers Can Steal Funds

One possible explanation offered by Leiber is that the fraud may have been committed through forged signatures.  Forging client signatures on withdrawal paperwork or bank checks is an unsophisticated, yet simple method to commit theft of client funds.

Nearly all independent financial advisers use third-party custodians such as Charles Schwab or TD Ameritrade to hold client assets. These custodians allow advisers to conduct discretionary trading in client accounts while preventing custody of client funds (with limited exceptions; advisers can have custody of client assets they have the ability to debit management fees from client accounts).

As a courtesy, advisers often facilitate withdrawals at the request of clients, meaning that clients will sign withdrawal paperwork that is forwarded to the custodian.  Once receiving the paperwork, custodians will transfer funds according to client instructions.

It’s this withdrawal paperwork that can be forged and submitted to the custodian without the client’s knowledge.

Strengthen Your Anti-Fraud Measures

Fortunately, advisers can implement internal processes to largely prevent fraud by forgery. One adviser acting independently can commit signature forgery with relative ease, but if that adviser’s actions are monitored or confirmed by another individual in the firm, the fraud is considerably harder to commit.

Larger firms benefit from the advantage of back-office staff that are often responsible for the confirmation of all account activity for the firm.  Astute back-office staff that check the details of account activity are likely to identify if a document has been forged.

Confirm Addresses and Payee Information

Specifically, back-office staff should independently confirm the receiving address for all account withdrawals. The registration of the receiving account should have the client’s name, a recognized family member’s name, or trust registration.  If the registration is suspicious, the withdrawal must be scrutinized.

Also, custodial activity should be monitored by staff and all withdrawals need to be verified against appropriate paperwork. If a client has checkwriting privileges on an account, staff often have the ability to view the check’s payee via the custodian’s online account activity review.

The added advantage of verifying check activity is if the client’s checks or account information is compromised (say, through identity theft), the account can be suspended to prevent further withdrawals.

More Work, But Worthwhile

Yes, this may seem like onerous work for a busy firm, but it’s in the firm’s best interest to have high standards to combat internal fraud.  Not only do confirmation processes strengthen trust between the client and the adviser, they can also provide proactive monitoring of the security of a client’s account in the event information is compromised.