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How can I protect myself from frauds?

Madoff and Stanford are two recent frauds that made the news in a big way. But I'm sure there are other cons that don't get caught, how can I protect myself?

Mar 16, 2012 by Lacy from Austin, TX in  |  Flag
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Peter C. Karp Level 20


Investment/Securities Fraud covers a wide range of illegal activities, all of which involve the deception of investors or the manipulation of financial markets. Investment Fraud also covers a wide range of illegal activities, all of which involve the deception of investors or the manipulation of financial markets. Scammers often try to make a new venture sound like a sure-fire money-maker, but investments always involve risk.

  • Here are some of the questions you should always ask when hiring any financial professional:
  • What experience do you have, especially with people in my circumstances?
  • Where did you go to school? What is your recent employment history?
  • What licenses do you hold? Are you registered with the SEC, a state, or the Financial Industry Regulatory Authority (FINRA )?
  • What products and services do you offer?
  • Can you only recommend a limited number of products or services to me? If so, why?
  • How are you paid for your services? What is your usual hourly rate, flat fee, or commission?
  • Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
  • For registered investment advisers, will you send me a copy of both parts of your Form ADV?
  • Does an independent custodian hold my assets?
  • What assurance do I have that you cannot access my assets?

Remember: there are many types of individuals who can help you develop a personal financial plan and manage your hard–earned money. The most important thing is that you know your financial goals, have a plan in place, and check out the professional you chose with your securities regulator. Do your homework.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  Aug 05, 2013 from San Francisco, CA

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Lacy, We wrote a white paper on that topic which can be found at http://assuredgroup.com/wp-content/uploads/2012/02/Keeping-Your-Assets-Safe-Brochure.pdf . While it is not all inclusive, following these simple steps would have protect against the two frauds you mentioned.

Comment   |  Flag   |  Mar 17, 2012 from East Dundee, IL

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Your advisor should not have acces to your money. Your investments should be held at a nationaly recognized custodian, like TD Ameritrade.

Comment   |  Flag   |  Mar 17, 2012 from Birmingham, AL

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Unfortunately, perpetrators of fraud are continually changing their tactics, so examining past examples will not necessarily protect you in the future. That being said, here are ten recommendations to help you avoid risk.

1) Ensure that your advisor and the custodian are independent of each other. It is more difficult for someone to commit a fraud if there are multiple, unrelated parties involved in handling an account. Madoff was both advisor and custodian for his clients' assets. 2) If you are not an investment expert, retain a fee-only investment advisor to provide counsel about investments and to help you manage your portfolio. Most fee-only advisors exercise limited control, and the incidence of fraud is less than with entities who have custody of assets. 3) Do your own due diligence. There is no substitute for research and analysis. If you cannot understand how an investment manager produces investment returns through your research, you may be better off avoiding that manager or strategy.
4) Check references, but do not rely upon them. A negative reference is a red flag, but a manager is unlikely to provide you with the name of someone who would provide a negative reference. Try to find an out-of-sample reference---someone who knows the manager but is not recommended by the manager. A positive reference should never be relied upon without additional due diligence. Personal referrals helped Madoff grow and expand his fraud for many years, as many investors came to him through recommendations of friends. 5) Check regulatory records. You can review the regulatory history and biographical information of your advisor and/or investment manager. A pattern of violations or an indication of exaggerated experience may be a precursor to fraud and is, at a minimum, cause for concern about other deceptive practices.
6) Check professional designations. Verify that your manager's stated professional designations are truthful, accurate, and up to date. As with regulatory records, if a manager is willing to misrepresent their credentials or exaggerate their meaning, the rest of their business may also be suspect. 7) If an investment sounds too good to be true, avoid it. Many investment ideas that are actively promoted sound too good to be true. They generally are. If an investment manager promises returns that appear to be unreasonably high, offers a guaranteed return that is inconsistent with the risk, understates the risk associated with an investment, or otherwise makes statements that do not hold up under scrutiny, then look elsewhere for ideas and counsel. 8) Liquidity, transparency, listed products. Many frauds are perpetrated through private funds and other lightly-regulated products. Investments in liquid, transparent investments that are listed on major exchanges, are highly regulated, and can be transacted through most broker-dealers offer a far safer alternative. 9) Brand names. Look for firms with strong brands and understand their role in the investment process. Stick to brand-name, bank custodians with strong capital bases. Their institutional strength, due diligence process, reporting capabilities, and focus on client service all combine to reduce the risk of fraud. 10) Trust your instincts. It is shocking how many people, after a fraud has been exposed, report that they had a feeling something was amiss. Of course hindsight is 20-20, but listen to that little voice telling you that something is not quite right.

1 Comment   |  Flag   |  Mar 17, 2012 from San Francisco, CA

Excellent tips

Flag |  Mar 17, 2012 near San Diego, CA

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Alex Bentley Level 18

Don't be sold a "product" you don't understand. If you are promised some kind of return that seems too good to be true, it probably is. Stick to publicly traded stocks, bonds, ETFs and mutual funds. Keep it simple and don't be afraid to ask stupid questions.

Comment   |  Flag   |  Aug 14, 2013 from Pacific Palisades, CA

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