I read with interest an article in Financial Planning Magazine entitled, “HD Vest Settles SEC ‘Supervisory Failures’ Charges“, which read in part:

HD Vest, a CPA-centric independent broker-dealer, agreed to pay $225,000 to settle SEC charges of supervisory failure, following the barring of a former independent representative who allegedly swindled his elderly clients of over $300,000. …

During his time with HD Vest, Lewis J. Hunter convinced two elderly clients to invest $250,000 in a Canadian bank in 2010 and 2011, providing fabricated guaranteed investment certificates and using their money instead to pay for personal expenses, according to charges filed by the SEC. Hunter also defrauded a third client of $54,000, the SEC claims.

Clients greatly undervalue the importance of safeguarding their money. We have developed a series of ten questions you should ask any financial adviser. And before even considering doing business with them, make sure that the answer to all 10 questions is “Yes.” It won’t guarantee you will get a great financial adviser, but it will help eliminate some very poor advisers. Here are the ten questions, and how clients of Mr. Lewis J. Hunter failed to follow them.

The answer to each should be “YES.”

1. Do you use a recognized third-party custodian to hold your client’s assets?

NO. They worked with an HD Vest representative to custody their assets at HD Vest. That’s only two parties: the investor and HD Vest & their representative. The SEC’s judgement found both the representative wrong (for embezzlement) and also found HD Vest wrong for failure to adequately supervise their representative.

2. Is there a good chance my investments will lose money?

NO. Mr. Lewis J. Hunter “fabricated guaranteed investment certificates.” No one bothers to fabricate documents showing that there is a good chance your investments will lose money, but all investments involve some risk. Any time you see a form of the word “guarantee” it should be a red flag that some type of shenanigans might be going on. Most likely you aren’t getting the return you need on your money. But sometimes your money isn’t going to get returned at all.

3. Is the daily price of everything you invest in listed in the Wall Street Journal?

NO. The supposed Canadian Bank investments were not publicly priced and traded. They were, after all, simply fabricated.

4. Do you avoid hedging or buying options? Does everything you invest in trend upward?

UNKNOWN.

5. Could you teach me to implement your investment strategy and let me do it on my own?

NO. Since his supposed approach was to find obscure Canadian Banks it wasn’t even an option for his two elderly clients to try his approach on their own.

6. After selecting your investment approach, could I change my mind at any time, immediately recoup everything left of my investment and have no financial hooks to keep me from dropping your approach?

NO. His clients were not able to contact the fabricated Canadian Banks and did not know how to unwind these supposed positions even if they wanted to.

7. Do you report a client-specific time-weighted return each quarter?

NO. I am certain that Mr. Lewis J. Hunter did not take the time to fabricate a time-weighted return each quarter on client portfolios which included these fictitious investment options.

8. Do you live a frugal lifestyle?

NO. The article does not give us this information. But if Mr. Lewis J. Hunter was bilking clients in order to pay for personal expenses he must have been living well above his means.

9. Is the fee I pay you the only compensation you receive?

NO. Commission-based broker dealers and their agents most often make their money on commissions rather than being compensated only by fees from their clients.

10. Do you sign a fiduciary oath?

NO. Commission-based broker dealers and their agents are often held only to a suitability standard rather than a fiduciary standard.

Whenever there is a story about embezzlement or Ponzi schemes usually several of these ten principles have been violated.

In this case investors should have known something was wrong when nine out of ten answers were “No.” We think you should avoid an adviser where even one out of ten are no. These should not be negotiable.

But, unfortunately, clients greatly undervalue the importance of these safeguards until it is too late.

And just to be clear, more government rules and regulations won’t protect you as well as following these ten principles will. The SEC did not find any failure to adequately oversee their representative in prior SEC visits. Only after the theft was it obvious that their policies and procedures were not adequate to prevent such embezzlement.

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