CINDY SANDERS

Last month, Bernard Madoff pled guilty to swindling billions from his clients. While a scandal of this magnitude is rare, Brad Pendleton, CFA, a senior financial advisor in Merrill Lynch's Nashville office, said similar crimes of a smaller nature happen more often than you might realize.

At the same time the Madoff drama was unfolding in New York, former Brentwood financial advisor Michael Park, owner of Park Capital Management Group, was slapped with federal charges for mail and wire fraud in his own multimillion dollar Ponzi scheme. On February 27, he admitted defrauding more than two dozen clients. In late March, Dennis Bolze was extradited from New Jersey back to East Tennessee to face fraud charges from a similar investment scheme.

So how do you protect yourself from being swindled by a smooth-talking "expert" advisor? First and foremost, do you homework.

Pendleton counseled investors to research both the firm and the specific advisor before handing over your hard-earned money. The anomaly of the complex financial industry is that almost anyone can claim to be a "financial advisor" with little or no background.

"The first thing I advise anyone to look at is the financial advisor's credentials and education," Pendleton said. "Do they have a background and training specifically in investments and financial planning?"

He added there are several credentials that might also serve as a good indicator of expertise. Three that Pendleton believes indicate a depth and breadth of knowledge are: CFP (Certified Financial Planner), CFA (Chartered Financial Analyst) and CIMA (Certified Investment Management Analyst).

Other industry designations include Certified Fund Specialist (CFS), Chartered Investment Counselor (CIC), Certified Public Accountant (CPA) and Personal Financial Specialist (PFS). While credentialing isn't an ironclad guarantee you'll make millions and never face an unscrupulous advisor, it does signify the person you're considering hiring has invested a time and effort into understanding their chosen field.

Stephen High, CPA, JD, PFS, also encouraged investors to get references on a potential financial advisor and ask a lot of questions on the front end. What qualifications and experience does the advisor have? What process or processes does the advisor use to develop the best portfolio for you? What costs are associated with investing?

Such due diligence should also encompass the financial advisor's firm. Reputable companies have several safety nets in place to protect their clients. Basic checks should include ascertaining there is an independent confirmation that stocks are being traded at the claimed price point, audited financial statements by a reputable third-party accountant exist, and an independent custodian holds assets.

"When we take a client's assets in as a brokerage house, those assets are never part of our balance sheet," explained Pendleton. He added Merrill Lynch uses Deposit Trust Corporation to hold those assets. High noted Kraft uses Schwab and Fidelity. All three are reputable, commonly used custodians within the industry.

Another safety net precaution is participation in federal and private insurance programs. Both Kraft Asset Management and Merrill Lynch insure banking deposits through the FDIC and participate in the Securities Investor Protection Corporation on the brokerage side. High said SIPC covers up to $500,000 in account protection including up to $100,000 in cash. In addition, firms should have private policies to protect clients' assets above the federally insured limits.

"As a firm, we have an additional policy with Lloyd's that is up to $600 million per client with cash protection up to $1.9 million," Pendleton noted.

Both Pendleton and High stressed these protections are in place to protect clients from criminal activity.

"It does not cover loss due to market conditions," High pointed out, "but covers where there is fraud or theft."

Both advisors also said if a company does not have safety net precautions in place and an advisor seems unwilling or unable to answer your questions, an investor should consider these lapses to be a major red flag.