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Investment Fraud and Outside Money Management

January 6, 2022 Blog

When you choose a broker or advisor at an investment firm to manage your portfolio, you expect your broker or advisor to manage your portfolio directly. While this is often what happens, it isn’t always the case. Sometimes, brokers and advisors will recommend that investors place their funds with outside money managers. Although this isn’t necessarily a bad option, it presents certain additional risks—including an increased risk of investment fraud.

What Is Outside Money Management?

Outside money management affords individual investors access to investment funds that are typically only available to institutional and high-net-worth investors. Fund managers oversee a pool of investor funds, and they choose investments that are well-suited to participating investors’ profiles and risk preferences. Or, at least, that’s how it should work in theory.

Why Do Brokers and Advisors Recommend Outside Money Management?

In exchange for connecting their clients with outside money managers, brokers and advisors typically charge an annual fee calculated at two to three percent of the total assets under management. So, as long as the fund earns more than two to three percent annually, it should prove beneficial to both parties. However, what brokers and advisors often fail to disclose is that:

  • Outside money managers charge fees of their own; and,
  • Other investment options with comparable average returns are available that do not entail the same costs and risks as utilizing outside money management.

Brokers and advisors also generally avoid discussing the fact that once they place an investor’s funds with an outside money manager, they typically cease playing an active role. So, in most cases, the annual two or three-percent fee truly is a referral fee (although it is charged in perpetuity). Fund managers may change their investment strategies, cease targeting certain classes of assets or start pursuing new types of investment products—and investors may never know about it unless they actively monitor their outside portfolios on their own.

What are the Investment Fraud Risks Associated with Outside Money Management?

Given the way that outside money management works, it presents a number of risks for individual investors. While brokers and advisors may pitch outside money management as a low-cost and low-risk option for investors who are seeking to grow their portfolios, this isn’t necessarily the case. Some examples of risks commonly associated with outside money management include:

  • Excessive Fees – Between brokerage fees and fund management fees, the costs of participating in an outside money management program can significantly reduce (if not eliminate) investors’ returns. Many of these fees are excessive on their own—and they become even more excessive when they are combined.
  • Unsuitable Investments – Since outside money managers do not know participating investors personally, they do not have a way to assess the suitability of their funds’ investments for individual investors. As a result, unsuitable investments are common.
  • Negligent Fund Management – Brokers and advisors that recommend outside money managers should monitor their performance, and they should take action to protect their clients when fund managers are negligent. Unfortunately, this is the exception rather than the norm.
  • Outside Money Manager Fraud – Outside money manager fraud is a very real concern. Since investors often have limited visibility into their outside-managed assets, discovering fraudulent transactions can be particularly challenging.

What are Your Rights as a Victim of Outside Money Management Fraud?

If your broker or advisor recommended that you invest with an outside money manager, and if you lost money as a result, what are your legal rights?

The answer to this question depends on the particular circumstances involved. If the outside money manager engaged in financial fraud, you should minimally have a claim against the manager. But, you could also have a claim against your broker or advisor.

For example, if your broker or advisor had a conflict of interest (i.e. if he or she received a large fee for recommending an outside money manager), you may be able to pursue a claim against your broker or advisor in FINRA arbitration. If your broker or advisor was negligent in selecting or overseeing the outside money manager, this could also provide grounds to pursue a claim. There are other possibilities as well; and, to determine what claims you can pursue given the facts of your case, you should consult with a lawyer promptly.

Talk to an Outside Money Management Fraud Lawyer at Zamansky LLC

If you need to know more about pursuing an outside money management fraud claim, we strongly encourage you to contact us for a free consultation. To discuss your options with a lawyer in confidence, call 212-742-1414 or get in touch online now.

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“Throughout my entire case, Jake Zamansky was incredibly responsive and spent time walking me through each step of the process. He is professional and worked with my challenging schedule, even meeting with me nights and on weekends. He knew exactly which turn to take when it came to my case and yet was respectful of any decisions I wanted to make resulting in a positive outcome.”

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“Jake Zamansky and his firm represented me in a FINRA arbitration case to recover investment losses. Jake and his team were very professional and worked very hard preparing for trial and then reaching a substantial settlement of our case. I would highly recommend them.”

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“Jake Zamansky represented me in a FINRA arbitration case which allowed me to recover a substantial portion of investment losses. He is truly an expert in this space and I would highly recommend him to those investors who may have been been a victim of investment fraud.”

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