Protect Your Investment Portfolio from Fraud and Bankruptcy
By Peggy Creveling, CFA, and Chad Creveling, CFA
Although it may not be common to have problems with a financial custodian, bankruptcies and fraud do happen. Although these types of issues may occur most frequently in the offshore world where regulators may not provide solid oversight, they can also happen in larger or better-regulated markets. This is especially the case during periods when market volatility is high and financial firms experience increased liquidity needs, margin calls, and counter-party risk.
In 2015, several foreign exchange brokers went bust when the National Bank of Switzerland de-pegged the Swiss franc from the euro, resulting in mayhem in the forex trading community. The U.S. has had some high-profile brokerage bankruptcies, including the collapse of Lehman Brothers in the 2008 financial crisis, and the fraud-related busts of firms like Bernie L. Madoff Investment Securities and MF Global.
For expats concerned about the safety of their investments, you can take steps to help make sure that your portfolio is protected. Here's a checklist:
- Choose to hold your investments at a custodian or broker-dealer that is regulated by a credible major regulator. Double-check with the regulator directly to make sure that the entity is indeed properly regulated. Find out if any complaints have been filed.
- Check with your custodian or broker-dealer as well as its regulator to see how your investment funds are protected from fraud or if the firm goes bankrupt.
- Check the financial strength of your custodian or broker. Look for a sizable equity base and strong credit rating.
- Avoid investments that are too good to be true—promising high returns with little risk. There is no such thing as a free lunch, as expat investors in fraudulent offshore property investments such as LMIM and Harlequin Property learned to their detriment.
- Avoid investments that are unregulated. As seductive as the bitcoin story may be, cases such as QuadrigaCX and Mt Gox show the difficulty of recovering assets when unregulated financial firms fail or are defrauded.
- Avoid custodians that partake in risky activities, such as derivatives trading. If your custodian conducts proprietary trading for its own book, ensure that this is done in a legal entity separate from where client accounts are held.
- Review and maintain a copy of your latest brokerage account statement showing the investments that the account contains. Make sure that the statement reflects all activity in your account and that holdings are correct. Any errors should be reported immediately to the broker in writing. If problems persist, contact the relevant regulator.
- For investors using U.S. custodians or broker-dealers, read about the role of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), whose specific job is to restore funds to investors with assets in the hands of bankrupt or financially troubled registered broker-dealers.
The good news is that unless a well-regulated broker-dealer or custodian engages in outside risky activities or outright fraud, the potential for bankruptcy is low. And even if a custodian goes bankrupt, as long as your broker kept client accounts separate, in most well-regulated jurisdictions your account should merely be transferred intact to a different, solvent broker.
This article is a revised and updated version of one that had appeared previously on www.crevelingandcreveling.com.
About Creveling & Creveling Private Wealth Advisory
Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. The firm is a Registered Investment Adviser with the U.S. SEC and is licensed and regulated by the Thai SEC. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future.
Copyright © 2020 Creveling & Creveling Private Wealth Advisory, All rights reserved. The articles and writings are not recommendations or solicitations, and guest articles express the opinion of the author; which may or may not reflect the views of Creveling & Creveling.