By: Rick Kahler | June 29, 2009 | Ponzi Schemes, Who Can I Trust?
Bernard Madoff, former NASDAQ Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, has been sentenced to 150 years in jail. While the lengthy sentence may not offer much comfort to those cheated out of their retirement savings by Madoff’s Ponzi scheme, it does emphasize the magnitude of his fraud.
His clients didn’t see this coming. Could they have? Let’s look at three key safety tips that might have protected them.
Know what you own. Stick to stocks, bonds, ETFs, and mutual funds that are publicly traded and listed on major exchanges like the New York Stock Exchange. They are valued independently at least daily, if not minute-by-minute, while the exchange is open. You can check their reported returns against your own portfolio. If you can’t look up the prices and performance of any potential investment in the newspaper or on the Internet, that’s a red flag and means you should ask a lot more questions.
Use an independent custodian. Madoff held his client assets, managed them, and priced them, too. See the conflicts of interest? Investment performance can look better if the prices reported to clients are manipulated, which is allegedly how Madoff showed winning results year after winning year despite market turmoil. At fee-only financial planning firms such as ours, clients have an independent third party such as TD Ameritrade or Schwab pricing each investment they own. The planning firm has no input on investment pricing, and that separation is a very good thing. Clients also get independent statements directly from the brokerage house.
Check on insurance. Our clients benefit from fraud insurance. The first part is Securities Investor Protection Corporation (SIPC) coverage for $500,000 per account. Fraud insurance does not protect against market declines, but it does protect against theft of securities and/or related fraudulent transactions.
One final thought: as always, if an investment sounds too good to be true, it probably is. Reportedly Madoff claimed consistent annual returns of 10-12% with little volatility and no annual losses. Potential investors should always receive such spectacular claims with strong suspicion.
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