How to Avoid Becoming a Victim of the Next Bernie Madoff
The Bernie Madoff scandal was a devastating experience for hundreds of investors who had placed their trust and money with his firm and lost it all. It also created a crisis of confidence for the markets and regulators. However, there are a number of lessons to be learned from the unfortunate misfortune of others. Here are a few red flags that will help you to avoid becoming a victim of a similar scheme in the future.
- Transparency – When working with any financial professional, transparency is vital. The ability to check your investment at any time via any independent source such as the internet or newspaper can help avoid any shady dealings. In the Madoff scandal, Bernie’s firm kept a very tight lid on asset values and investments. Clients would receive a statement once a year with only a dollar value. There was no mention on these statements indicating where the money was invested and, therefore, the clients had no ability to independently verify the value of their investments.
- Independence – A way to practically ensure that your money is exactly where you expect it to be is by separating the custodian from the advisor. This means that the institution that is holding your money is independent from the firm or advisor that is managing the money. In the case of this scam, Madoffs firm had complete control of the assets and managed the assets. The statements that clients received were created by his firm and said whatever Madoff wanted them to. There were no checks and balances. By separating the advice from the custodian, you create a scenario where two entities are sending statements and are accountable to each other. It is extremely difficult, if not impossible, to create a Madoff-type scam if the assets are handled this way.
- Returns that are too good to be true – Even the best financial advisors and money managers experience difficult times. When investing, the path to profitable returns is almost never a straight line. This does not mean that there aren’t periods when advisors or the market could produce a series of large returns, however, when an investment professional has a 20 year streak of well above average returns each year, it should raise a red flag. There are numerous talented financial professionals that have a long-term history of performing better than average. However, even the best money managers go through slumps. Warren Buffet has had numerous years when his performance fell short of the market. However, it is his overall return that makes him so talented, not a perfect record.
- Use Common Sense – We should all be a little wiser after the experiences in the market, economy, and scandals of the past. Let common sense be your guide. If the way your money is being handled doesn’t sit well with you, don’t be afraid to investigate or make changes. Giving one person the keys to your kingdom is not necessarily a bad thing, but it can lead to problems if not monitored. Use your head and focus on independence and it will be very difficult for someone to take advantage of you and your money.