The Bernie Madoff scandal was a devastating experience for thousands of investors who had placed their trust and money with his firm and lost it all. Madoff's Ponzi scheme also created a crisis of confidence for investment markets and regulators. However, lessons can be learned from the misfortunes of others.
Here are a few red flags that will help you avoid becoming a victim of investment fraud.
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 a newspaper, can help avoid shady dealings.
In the Madoff scandal, Bernie’s firm kept a 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.
Bernie Madoff's investment firm maintained complete control of assets entrusted to them. The statements that clients received were created by his firm and reflected whatever Madoff wanted them to say. 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. The path to profitable returns is rarely a straight line. Although advisors or the market could produce a series of large returns, an investment professional with a 20-year streak of well-above-average returns each year raises a red flag.
Many talented financial professionals 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 several years. 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 may seem easy, but it can lead to problems later. Using your head and focusing on independence will be very difficult for someone to take advantage of you and your money.
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Source:http://www.dummies.com/how-to/content/how-to-avoid-becoming-a-personal-investing-victim.html
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