Beware of unscrupulous financial advisers

Individuals put a lot of faith in financial advisers, making them vulnerable to fraud. But you can protect yourself, writes Nicky Burridge

PUBLISHED : Monday, 28 January, 2013, 12:00am
UPDATED : Monday, 28 January, 2013, 7:19am

City University professor Lindsay Miller was left with a HK$1.75 million loss after his adviser lied about where she had invested his money.

Pauline Cousins, the former managing director of Crown Asset Management, claimed she had invested the lump sum in an investment-linked assurance scheme, even producing statements belonging to other clients to show how the investment was doing.

But in reality, without Miller knowing, she had used the money to buy shares in a hi-tech company that was subsequently put into administration.

Cousins was convicted in 2009 in the District Court of four counts of furnishing false information and sentenced to 21 months in prison.

Such are the all-too-common tales of financial advisers taking advantage of Hongkongers' trust, and taking their money. The matter leaves investors with a dilemma. Many people want to invest, and they want independent advice. They may not want to rely on bank staff or insurance agents for advice, as they are selling products and may be thinking mainly of their performance targets or commission.

So they turn to financial advisers, but then they have to worry about fraud and embezzlement.

Advisers are often empowered to invest for clients and move money on their behalf. Any adviser with a speck of creativity and the will to commit wrongdoing can siphon cash from investors' accounts.

This is exactly what happened to 30 clients of Tang Siu-fong, who worked for Fair Eagle Securities.

For two years (2009 to 2011), Tang failed to carry out trades in accordance with her clients' instructions, and instead carried out her own unauthorised transactions on their accounts.

She forged clients' signatures to withdraw their shares, and deposited blank cheques from their accounts into her own.

To cover her tracks, she withheld contract notes and statements from her customers and instead sent them false versions to make it appear as if all was well.

By the time the authorities caught up with her, Tang's 30 clients had collectively lost HK$6.4 million.

Don't give them your money

There is an inherent vulnerability built into an investor's relationship with a financial adviser. The adviser may have a legitimate need to access your funds, to invest on your behalf. The unscrupulous ones can always then find ways to pilfer funds, no matter how tight the controls.

To prevent such abuse the Securities and Futures Commission requires advisers to put client money into a segregated account.

This separate account is known as a third-party client account. It should be used only for clients' money and audited to ensure that the money is not misused. To safeguard funds, investors should write the words "client account" on their cheques, alongside the name of the firm in the payee information.

The problem is, advisers do not always adhere to the separate account rule. "If someone is determined to misuse client money, they will usually find a way. They will eventually get found out, but by then it might be too late for the client," says Robert Flux (left), a director at Simmonds Financial, an advisory firm.

He says clients should not hand over their money to their adviser in the first place.

"Whenever we recommend any third-party product or service provider, we have clients remit money directly to the group concerned," he says. "If advisers ask for the money to be paid directly to them, I would caution clients to ask why they are doing that. It just brings in an extra layer of unnecessary risk."

Jessica Cutrera (left), managing director of financial advisers EXS Capital, agrees. "Embezzlement is pretty easy to avoid. Most asset managers, like ourselves, do not take custody of client funds, but rather use licensed, insured third-party banks and brokerages to hold client money," she says. "We can't run off with client money, as we only have authority to trade and bill for our fee, not to withdraw funds."

Consumers leave themselves vulnerable to abuse when they give their adviser too free a rein on what to do with their money.

For example, many firms recommend that clients let them manage investments on a "discretionary" basis. This means the advisers have some freedom to buy and sell assets on behalf of clients, without consulting them on every trade.

Discretionary accounts are something of a buzzword in the advisory industry, and indeed they have much to recommend them - they put investing decisions in the hands of professional advisers, and out of the hands of clients who might be prone to overtrade, and impulsively so.

But discretionary accounts also give corrupt advisers a lot more room to steal cash from clients. "You are at their mercy to allocate the money as they see fit," says Flux. "They do not need to get any authority from you, the client, to move the money. You are only going to know where you are allocated once you see your next statement."

The SFC says investors' lack of awareness and reliance on their account executives are key factors leading to misappropriation.

The commission warns that people should not give their advisers discretionary authority to manage their account without seriously considering whether this is necessary or suitable for them.

The SFC advises that investors check statements carefully. Brokerages must issue a trading statement within two days of a stock transaction. They need to send clients a general statement about their account each month.

Consumers should also flag any handwritten amendments or other discrepancies in statements with the compliance department of the firm they are using.

The SFC also advises people to make sure contract notes and statements are delivered directly to them, the investor, and not to their adviser.

Most importantly, consumers should never issue cheques or deposit money directly into their adviser's or broker's account.

Flux also recommends that people carry out some due diligence when appointing an adviser.

"I suggest you ask good friends or trusted professionals, such as your lawyer or accountant, whom they recommend. Ask how long they've dealt with them and what their personal experience of working with them has been," he says.

But even personally knowing your adviser offers no guarantee. Lantau Island resident Yvonne Sargent used a family friend as her adviser. On his guidance, the pensioner invested a lump sum from a divorce settlement in a London pension fund.

The investment did well for the first seven years, but then dropped below its original value.

Her adviser then suggested that she should move the money to a Dubai-based firm, but Sargent was sceptical, particularly after she found out the adviser had moved the funds without her permission.

She says: "For two days, I did not know where my money was."

Her son interceded on her behalf and the money was recovered, but Sargent lost all faith in her adviser.