Can a Financial Advisor Steal Your Money?

Whether it’s a stock market crash or a string of poor investment decisions, losing your money is the worst nightmare of every investor. For investors who work with financial advisors there’s a more specific fear — being taken advantage of and having money stolen. While the vast majority of advisors earn the trust and confidence of their clients by doing their jobs with skill and integrity, there have been plenty of cases of unscrupulous advisors bilking their clients, none more notorious than Bernie Madoff. The former chairman of Bernard L. Madoff Investment Securities ran the largest Ponzi scheme in history, defrauding investors of $65 billion over the course of nearly two decades before he was arrested and sentenced to 150 years in federal prison.

Working with a financial advisor can be a smart move, but before you hand over control of your money, here are the protections and warning signs worth knowing.

What Is Custody and What Are the Rules Surrounding It?

Investment advisors registered with the Securities and Exchange Commission must comply with the custody rule, a provision of the Investment Advisers Act of 1940 intended to bolster the safeguards of client assets. Under the rule, financial advisors have custody of client assets when they hold client funds “directly or indirectly” or have the “authority to obtain possession of them.” This includes deducting fees from a client’s account.

The rule stipulates that client assets be held by a qualified custodian, which can be a financial institution like a bank or broker-dealer. While most advisors rely on third-party custodians to safeguard their clients’ assets, registered advisors may also technically be qualified custodians themselves.

The rule also requires qualified custodians to send account statements to clients, at least quarterly. Advisors, meanwhile, must have a written agreement with an independent public accountant to examine client assets “on a surprise basis every year,” according to the SEC. The third-party accountant who performs this audit will contact some or all of the advisor’s clients and confirm their holdings with those listed in the advisor’s records.

While the custody rule aims “to provide additional safeguards for investors against possible theft or misappropriation by SEC-registered investment advisers,” the SEC recommends investors continually monitor their investments and “exercise care when making investment decisions.”

Keep These Warning Signs in Mind

If you’re worried about the prospect of being taken advantage of by a financial professional, there are several warning signs to be on the lookout for. Of course, none of these scenarios automatically mean an advisor is stealing from you. However, they may indicate that your advisor operates with less transparency than others, doesn’t have your best interests in mind, or they are in fact taking advantage of you.

They’re Not a Registered Investment Advisor

Unfortunately, just about anyone can call themselves a financial advisor, with no certification or training required. Any advisor registered as an RIA, whether with the SEC or their state securities board, is legally required to abide by fiduciary duty and put your interests ahead of their own. Advisors who are not registered as an RIA may not be a fiduciary and may not be legally obligated to act in your best interest or follow the custody rule that requires client assets to be held with a qualified custodian.

You Aren’t Receiving Account Statements

Qualified custodians must send statements to account owners, at least quarterly. As a result, if you’re not receiving statements from the financial firm that serves as your qualified custodian, that may be a red flag. If this is the case, the SEC recommends contacting your advisor and/or custodian and finding out why.

They Have Significant Disclosures on Their Record

The SEC requires financial advisors to publicly disclose past criminal, civil and regulatory actions taken against them. This can range from a monetary penalty an advisor paid for an alleged regulatory infraction to allegations of criminal behavior. Advisors must disclose these events on their Form ADV, documentation that’s updated each year. Members of the public can access advisors’ Form ADV documents on the SEC’s Investment Adviser Public Disclosure website. Beyond any legal and regulatory action taken against the advisor, look out for lawsuits filed against them in the past.

They’re Making Too Many Trades

Also be on the lookout for excessive trading within your account. An unscrupulous advisor or broker could engage in a high volume of transactions simply to generate commissions for themselves. This practice is known as churning, and while this may not seem like outright theft, it’s illegal.

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Steps to Take to Protect Your Assets

If you’re concerned about potential theft, there are several precautions you can take to protect yourself and your assets.

First, you can hire an advisor only to give you advice, not directly manage your portfolio. Another alternative is to have an advisor manage your investments on a non-discretionary basis, meaning you’ll have final say on the individual trades and transactions they make. This is different from discretionary management, by which the advisor makes decisions on your behalf and doesn’t need you to O.K. individual transactions.

You can also consider writing checks directly to your third-party qualified custodian and limiting the amount of personal information you share with your advisor.

Lastly, do your proper due diligence while you’re in the process of hiring an advisor. You may be inclined to sign on with the first advisor you talk to, but try to interview at least three advisors. Ask about any certifications they hold, whether they work on a fee-only basis or can collect commissions for recommending certain products and services. Chances are that you’ll notice some differences between them, from the fees they charge to their investing strategies and the types of clients they typically work with.

Also use the SEC’s Investment Advisor Public Disclosure website to look up the advisors and check for any history of disclosures. To do this, search for the individual advisor or firm and then click on “View Form ADV By Section.” From there, select the “DRPs” tab. If the advisor or their firm has any disclosures, they’ll be categorized as criminal, regulatory and civil proceedings. A summary of the allegations will be included and how the case as resolved.

What to Do If Your Advisor Defrauds You

If a financial advisor misuses client funds, clients have several legal paths to pursue recovery and hold the advisor accountable.

File a Formal Complaint

The first step often involves filing a formal complaint with regulatory agencies, such as the Financial Industry Regulatory Authority (FINRA) or the SEC. These organizations have enforcement power, allowing them to investigate claims, impose penalties and even revoke the advisor’s license.

Civil Litigation

Beyond regulatory complaints, clients can seek restitution through civil litigation. Suing an advisor directly in court allows victims to pursue damages for the lost funds and, in some cases, additional compensation for emotional distress or punitive damages. However, court proceedings can be lengthy and may require extensive evidence of wrongdoing, which is why clients often seek specialized legal counsel experienced in financial advisory fraud to improve the chances of a favorable outcome.

FINRA Arbitration

For cases involving FINRA-registered advisors, FINRA arbitration is an alternative to traditional court. This option is commonly chosen because it’s designed to be a faster, less expensive process than a lawsuit. In arbitration, an impartial panel reviews the evidence and issues a binding decision, which can lead to compensation for the client if the advisor is found guilty of misconduct. Although arbitration can limit appeals, it generally offers a streamlined approach to recovering losses without the complexities of a full court trial.

SIPC: Securities Investor Protection Corporation

A dishonest financial advisor can steal your money if you're not careful, so you'll want to be aware of some important red flags.

Many investors assume that government-backed protections will cover them if something goes wrong with their financial accounts. The reality is more limited, and the gap between what these programs actually do and what investors believe they do is where significant confusion tends to occur.

SIPC: Securities Investor Protection Corporation

SIPC is a nonprofit membership organization created by Congress to protect customers of failed broker-dealers. If a brokerage firm collapses and client assets are missing or inaccessible, SIPC can facilitate the return of securities and cash up to $500,000 per customer, with a $250,000 sublimit on cash claims. It is not a government agency and does not receive taxpayer funding.

The boundaries of SIPC protection are just as important as what it covers. It does not compensate investors for losses from market declines, unsuitable recommendations or fraudulent advice that did not cause assets to go missing from a solvent firm. If your securities were simply worth less than you paid for them, or if an advisor made decisions that cost you money, SIPC cannot help. It also does not extend to commodities, futures or fixed annuities, and firms that are not SIPC members fall outside its scope entirely.

The distinction matters in fraud cases specifically. SIPC can only return assets that exist and can be located. When a Ponzi scheme fabricates account statements showing balances that were never actually invested, SIPC’s ability to make investors whole is constrained by what can actually be recovered from the fraudster’s estate. Investors in these situations often receive significantly less than their paper account values showed.

You can confirm SIPC membership for any brokerage firm at sipc.org before opening an account.

FDIC: Federal Deposit Insurance Corporation

FDIC protection applies to deposit accounts at member banks. The standard limit is $250,000 per depositor per institution per ownership category. Because different ownership categories, such as individual accounts, joint accounts and certain retirement accounts, are treated separately, a single depositor can hold more than $250,000 in total insured deposits at one bank by using multiple account types.

A critical point that many bank customers miss is that FDIC protection stops at the deposit. Investment products sold inside a bank, including mutual funds, annuities, stocks and bonds, carry no FDIC backing regardless of where they were purchased. The physical location of the sale does not change the nature of the product. A variable annuity sold at a bank branch is not a deposit and is not insured.

You can verify whether a specific bank participates in FDIC coverage using the BankFind tool at fdic.gov.

What Neither Program Covers

Both SIPC and FDIC are designed to address institutional failures, not individual misconduct. When an advisor steals directly from a client, recommends products for personal gain, misappropriates funds or engages in unauthorized trading while the firm itself remains operational, neither program applies. The firm has not failed, and no deposit has gone missing from a failed bank.

Recovery in those situations runs through a different set of channels entirely: regulatory complaints filed with the SEC or FINRA, civil litigation against the advisor or firm, or FINRA arbitration for cases involving registered broker-dealers. These distinctions are worth understanding before an investor finds themselves in a situation where they assumed a government protection program would apply and discovers it does not.

Bottom Line

There are several steps you can take to protect your financial assets from theft.

Yes, an unscrupulous financial advisor can steal from you, so it’s important to take the time to hire a fiduciary advisor you can trust. Advisors who are registered with the SEC must act in your best interests and follow the custody rule, a set of regulations designed to safeguard your assets. However, you should still be cognizant of potential red flags and ways in which you can protect yourself from theft.

Tips for Hiring a Financial Advisor

A fiduciary advisor puts your best interests ahead of their own. Finding a fiduciary financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Understand the difference between a fee-only and fee-based advisor. While the former is compensated solely by the fees their clients pay, the latter may collect commissions for recommending insurance policies or financial products in addition to client fees. This can create a conflict of interest. When receiving advice from a fee-based professional, you should make sure you know what it’s based on, in which role it is being given and how the advisor may benefit.

Next Steps

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