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How to Guard Against a Wolf of Wall Street

The author of 'The Safe Investor' explains how to avoid becoming a victim

By Tim McCarthy

Some investors have told me that when they interview a broker or financial adviser, in hopes of hiring one, they feel like Little Red Riding Hood looking at the Wolf in Grandma’s nighty.

As I noted in my recent book, The Safe Investor, it’s little wonder that many investors fear brokers, given the revelations made popular by the recent movie, The Wolf of Wall Street, about Jordan Belfort defrauding customers through his boiler-room operation, Stratton Oakmont.

Further adding to investor fears: the recent disclosures in the Wall Street Journal about bad brokers — called “cockroaches” — who move from firm to firm, making it difficult for regulators to track them.

How Some Financial Pros Turn Into Wolves

Rest assured, the overwhelming majority of brokers and financial advisers are honest and competent professionals who genuinely work to help their clients. But how do you go about finding a broker/adviser who won’t be a Wolf and ensure that the pro you have doesn’t turn into one?

Over the decades, I’ve learned that many people looking for financial advisers naturally look to their background and reputation and think: if he is famous or has had an impressive career, he must be trustworthy. Sadly, they may be mistaken.

(MORE: Life Lessons From 'Wolf' and Other Films)

I personally know three professionals who fit this type of profile but turned out rotten— a banker who embezzled investors, a fund manager who put investors’ returns into his own account and the notorious Bernie Madoff.

All three actually did a good job in the early part of their careers for their customers. They became wealthy and did not need to commit fraud, especially after such accomplished careers.

But then, each one decided to stop doing one little thing the right way. Over time, as is often the case, their infractions multiplied. These advisers also were quite arrogant, believing they were better than everyone else.

Many ethical people who knew them well continued to give good references because they simply couldn’t fathom that such an upstanding person would go to the dark side. That led to more investors signing up and then becoming victims.

Finding a Reputable Broker or Adviser

Here’s a process I recommend that can substantially increase your chances of not falling prey to a Wolf of Wall Street (no guarantees, however):

When beginning your search to hire a broker or financial adviser, talk to a lot of people. Aim to interview multiple candidates from different firms. Once you’ve narrowed down your choices, try to have quick conversations with their compliance officers or get to know their office managers and even the advisers’ assistants.

Each can give you a different angle into the adviser’s personality. Since you’ll be a prospective client, these people will often like that you want to meet them and will make the time to do so.

(MORE: Growing Danger of Penny Stocks)


Check references, not only upfront, but periodically. As I learned from the experiences I noted above, people can change over time.

Try to get what are known as “uncontrolled references” — people who aren’t necessarily recommended by the adviser, but know him or her. For instance, if you ask the adviser for a customer reference, you can then query that customer for names of other clients or people that know this money pro. A prospective adviser should also be able to give you names of accountants and attorneys who can provide you with different perspectives.

Look for past violations, felonies and bankruptcies. The adviser should either be a Brokerage Representative or Investment Advisor registered with your state investment adviser regulator or with federal agencies such as the Securities and Exchange Commission (SEC) or Financial Industry Regulatory Authority (FINRA). Check out the person and his or her firm by logging onto the regulator’s site, according to the broker/adviser’s registration.

Since some financial advisers have managed to get their previous blemished records expunged, ask the adviser in front of his compliance officer (or in writing) if he has “ever had any violations or infractions in the past, including any charges of felonies in or outside the industry, or ever gone bankrupt.” The wording is this specific for a reason: It then becomes more difficult for a crook to deny and puts his firm on the line. If the adviser refuses to answer, take your business elsewhere.

Before you invest with a pro or agree to him drawing up a financial plan, get a second opinion. Have an independent person experienced in finances take a look over a written statement from the adviser laying out financial products being recommended and the fees involved. You probably have an accountant, attorney, banker or an experienced investor friend who’ll review things for you.

You’d get a second opinion before surgery, right? Well, your life savings are as important as your life, even if you have to pay a small fee for such a second review.

Never write a check, or transfer money for an investment, directly to a financial adviser. Always make sure you know the institution and the account your money is going into. And use an abundance of caution: Don’t ever transfer all, or most of, your money all at once. Break up the transactions, just to make sure all is copasetic.

Verify that your funds are properly invested. Check with the proper custodian, bank or brokerage firm to see the product description and pricing of your positions. You should be able to access this information separately from what the adviser provides — for instance, by mail from the institution’s operations group or the separate custodian.

Examine your entire investing process looking for any single point where you could potentially lose all or most of your money.

Never trust a single person or firm with all your money unless you have independent verification of the advice and where your money really is.

You’ll always want to keep a little skepticism in order to avoid being eaten by a Wall Street wolf.

Tim McCarthy Tim McCarthy is author of The Safe Investor. He was CEO and Chairman of Nikko Asset Management, President and COO of Charles Schwab & Co. and President of the Fidelity Investment Advisor Group. Read More
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