Who Has Your Money?

Who Has Your Money?

Where does your money go when you work with a financial advisor?  Who has your money?  This important detail can keep you from getting ripped off.  Watch this video to find out.

FULL TRANSCRIPT:

So where does your money go when you work with a financial advisor? Who has your money?  Find out coming up.

Hey there folks.  I'm Patrick King with Transformative Financial. Here on this channel, we help people make money, keep money and feel more financially secure along the way.

If that's something that interests you, please contact me.  My email is patrick@transformative-financial.com.  Contact information is in the show notes below.  I'd love to talk with you and see if it's a good fit.

On today's episode, though: if you work with a financial advisor, where does your money go? Who has your money?

In the case of, let's say, you take your money to the bank, it's fairly straightforward.  You give them the money and they keep it. You know, it's there.  You might get an interest payment for allowing them to lend that money to other customers of the bank, but it's safe and secure.  You can get it at any time.

If you work with a financial advisor, it's not quite the same. So any "real" financial advisor, for an element of safety, will use something called a "third party custodian".  Now, what is a custodian?

A custodian according to the dictionary, Merriam-Webster's, is "one who is entrusted with guarding and keeping property or records".  So a third party custodian is someone who is entrusted to keep your assets when you work with a financial advisor.

Now, why is this important?

It's important for my clients because, number one, there's an extra element of safety and transparency. You know, everything that I do, I want to be completely transparent with my clients on that.

So, when my clients work with me, my custodian is TD Ameritrade. They get monthly statements from TD Ameritrade, they get trade confirmations anytime that I do something in the account. And so, my access to their money is limited to being able to make trades, and being able to bill fees, if that's the arrangement that I have with the clients in that case.

Some clients, like retirees, might give me additional access where I can move money from their account to their bank account every month so they can pay their bills. So they get their monthly check.

And for those that are saving for retirement, I may have access to move from their bank account into their investment account every month and start putting that money to work for them.

But that's the extent of it.

And again, it's for an element of safety and transparency. You know, worse comes to worse, if I get hit by the proverbial Marta bus here in Atlanta, their assets are safe.  Nothing happens to them. It's there at TD Ameritrade for them to access at any time.

It also gives them the confidence to know that they're working with a professional that is putting these layers of safety into effect, you know, when they're working with me.

There's also a convenience factor. TD Ameritrade and other large custodians will allow those clients that need those monthly distributions in the case of retirees, or monthly contributions in the case of those people who are saving for retirement to link to those bank accounts, automate that stuff.

There's the technology that's around having a custodian in my corner, too, that allows me to import that data into my financial planning software, where I can manage the portfolio. I get free access to rebalancing software by working with my custodian. So, it allows me to serve my customers better and more efficiently.

And then finally, costs! Costs!  It's very important to make sure that my clients get the best deal that they can when I'm doing the trades for them.  That they get the best execution, they get the lowest trading commission fees.

And right now, there's a lot of competition between these big custodians like TD Ameritrade, Schwab, Fidelity on competing for advisors' business like mine, because they're seeing that the independent advisor space is the wave of the future.

So I want to make sure that my clients have that safety, transparency, confidence in working with me, the convenience of working with a big custodian that's in my corner, the technology that comes with working with someone, and then the low costs.

All right, what happens if there isn't a third party custodian involved? Now, this is the big issue.

You know, for high net worth client that do investing in private investments, it's not uncommon to do a private equity or real estate or private debt deal with a company that custodies their own assets.  Now the drawback here is that you don't get accurate reporting, there's less transparency around what's going on.

Again, in that space, it's a little bit - I would say - not uncommon, but it's not ideal.  If you're doing those types of investments, it's best to have someone that's working with a third party custodian and has an independent audit involved.

What is the worst case that could happen if there's not a third party custodian involved?

Well, you remember Bernie Madoff, right?

That's really the key with what happened there. Madoff's firm custodied those assets. They didn't use a third party custodian. You know, there were other factors involved.  They had, basically, a lazy auditor that could have uncovered all of this much, much earlier than it was. But in that case, if Madoff's firm had used a third party custodian, there would have been accurate statements and trade confirmations along the way and those investors would have known.

It was a big red flag to begin with, but I guess they fell to the siren song of all his return promises that he made along the way.

So, that would be the worst case scenario in one of these deals if you don't have a third party custodian.

So, who has your money?

If you're working with a broker or an insurance agent, where is your money held?  Is it at a brokerage firm? Do you have your money all in the bank?  Is it not being invested?

Leave me a comment and share with me stories about what's going on with you as far as who has your money.

That's all I've got for today, folks. Thank you so much for watching.

If you like this video, click "like".  Subscribe for more of this kind of content.

Again, I'm Patrick King with Transformative Financial. Thanks for watching and talk soon.  Cheers.

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