Madoff Five Years Later

It was the first global Ponzi scheme ever, spreading like a slow-moving virus from Manhattan to Palm Beach, Southern California and many points in between. It even extended overseas, notably to Europe and the Persian Gulf. The loss tally: $65 billion in paper wealth and $18 billion or more in cash.

Bernard Madoff was almost certainly the biggest investment con man ever. But he wasn’t the first or the last. Many other significant scams have been uncovered since Madoff was nabbed five years ago this week. Inevitably, others are floating below the surface now. Who knows how many?

The Securities and Exchange Commission botched numerous chances to adequately investigate how Madoff could deliver consistent returns averaging 1 percent or so a month regardless of financial-market ups and downs.

But the real fault for Madoff’s spectacular success wasn’t inept or disinterested regulators. It was clueless investors.

Many people think that when you choose an investment advisor, you should first consider people you think you know and can trust, like family and friends.

Wrong. Crooks and even just incompetent, sometimes desperate people can lose any compunction about ripping off those closest to them. Just as Madoff did.

Despite his seemingly spotless reputation, or actually because of it, he stole from everybody, including those closest to him. Not because he needed the money, but simply because he could.

Investment swindlers invariably exhibit telltale signs of fraud, just as Madoff did. If you have an investment advisor now or are considering one, these are the key warning signs of potential trouble:

Red flag #1: The advisor has custody of clients’ assets. This gives the thief access to your money. And custody enables the advisor to inflate asset values and issue false statements.

Insist on assets held separately in your name, in custody at a major ! broker-dealer firm that’s not controlled by the investment advisor. Regular financial statements should come directly from the broker custodian, in addition to your advisor.

Avoid any investment manager who wants checks made out to him/her or a company he/she controls. The advisor can have a limited power of attorney to make investment decisions if you delegate that function. But that’s it.

Red flag #2: The investment performance is “too good to be true.” Scamsters claim consistently good returns not only to attract money, but also because investors who think they’re getting steady results every year, including those when the market is down, are less likely to withdraw their money.

But every true investment manager has down years and periods of underperformance compared with the market averages. And the market averages themselves are volatile.

The Standard & Poor’s 500 has returned about 10 percent annually on average since 1926 (including reinvested dividends). But there have been only three years since then when the return has fallen in the 9-11 percent range. So you should expect variable results, some up and some down.

Red flag #3: Unusually low management fees. Admittedly, this is not common because most investment managers charge too much, not too little. At best, rock-bottom fees likely mean the manager won’t do much for you. At worst, they’re just a way to entice you. They could also mean hidden sales commissions or other compensation.

Red flag #4: The investment strategy is “a secret” or “too complicated” to explain. Avoid any advisor who won’t provide an understandable explanation of what he or she does and what it means for you. You don’t need to understand all the details, but the big picture should be clear.

Red flag #5: The “advisor” projects exclusivity. Beware someone who’s playing hard to get or implying that you’d be lucky to g! ain accep! tance into a special group. The truth is, legitimate investment managers actively want your business.

Also be leery of the advisor who brags about his or her associations with the rich and famous and/or nonprofessional activities, such as favorite charities. Not only do these provide no benefit to you; they may well reduce the amount of time the manager spends on your investments.

A Final Caution

You need to do your own research, not only to ensure that any investment program is legitimate, but also that it’s right for you. Don’t blindly accept a recommendation from a friend, business associate or family member.

An investment advisor generally should be registered with the SEC or individual states. Check sec.gov for the advisor’s form ADV, which discloses information about the firm, including any disciplinary actions. Such advisors are legally required to act in a client’s best interests. Stockbrokers are required only to recommend suitable investments. You can check them at finra.org.