Investment Scams — How To Safeguard Yourself

by Neal Frankle, CFP ®

Over the last several days, you’ve probably been hearing about Bernard Madoff and how he has allegedly stolen billions of dollars from individuals over the last several decades. It’s one of the biggest investment scams ever.

You are probably asking yourself how this could have happened. What is the real story of Bernie Madoff? How could intelligent people invest their hard-earned dollars and not know what they were getting into? How could those same people not know what was going on with their money over years and years and years?

I ask myself a different question – or maybe the same question, but from a different perspective. I wonder if an investor could have avoided the problem entirely.

I haven’t seen all the details yet, but my understanding is that Mr. Madoff reported great returns year after year regardless of what the market did. A lazy person might just consider that and make an investment decision. A lazy person might not take the time to understand investment strategies that work and thereby know that such results are not possible. A lazy person might not get a second opinion. Obviously, the heady returns that Mr. Madoff supposedly reported fed the greed which fed the laziness. It all works together.

I wonder where all these investors’ CPAs were too. This is especially troubling. Again, I don’t know all the facts, but I can guess that these clients were not getting third-party statements confirming the existence of the investments. For example, you may have a lousy broker, but at least your investment is for real. You know this because you get monthly statements from either the brokerage house or the custodian (Schwab, Fidelity, TD Ameritrade, etc.) You might even dig deeper and find out more about your mutual fund holdings.

Since the allegation is that these accounts actually never existed, my guess is that the clients and their CPAs never got statements from the third-party custodian. Again, the greed fed the sloth and that led to the result. I hope that you are not a victim of this alleged fraud or any other fraud. I know if you do your work, the odds of this happening to you in the future will be reduced significantly.



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