In a world where investor confidence has been shattered by massive mismanagement by top executives in the banking, insurance, mortgage lending, stock brokerage and auto industry fields, now comes the greatest Ponzi scheme in history. Bernard Madoff has reportedly admitted and is accused of bilking experienced investors worldwide out of an estimated $50 billion. There are many aspects of this case that are simply astounding. First is the sheer amount of money involved…$50 billion. Next is the number of years Madoff was able to keep the scheme going without getting caught. Finally, it’s amazing the number of so-called sophisticated investors that were caught in his web of deceit. As a former chairman of the NASDAQ Stock Exchange, investors and regulators alike viewed his credentials and reputation as impeccable.
- The single biggest safety guard for protecting yourself is to make certain that your custodian, the company where your money is held, is separate from your investment advisor. In the Madoff case, his company served as investment advisor and also held the client assets. Client statements were controlled, and falsified, by Madoff. The key here is to make sure your statements are being produced by a third-party custodian such as Charles Schwab, Fidelity, or Vanguard.
- Be sure to review your statements. Too often, people ignore their statements assuming all the details are being taken care of by their investment advisor. When reviewing your statements, look for security purchases or sales that appear contrary to your agreed-upon investment strategy. If you find anything unusual, contact your advisor immediately for an explanation. If you do not receive a satisfactory answer, speak with your investment advisor’s supervisor or, if necessary, a securities regulator or simply move the account to another advisor. In Madoff’s case, his returns were too ‘steady’ showing earnings of approximately 1% per month for years. In the stock market world, that should have raised many red flags.
- Understand the relationship with your advisor. Many advisors have a fiduciary responsibility to their employer, not you. One group, Certified Financial Planners (www.cfp-board.org), are required to have a fiduciary relationship with you, the client. While this direct fiduciary link is not a guarantee against fraud or a guarantee of competence, it is a giant leap in the right direction.