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Victoria, TX 77901

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Protecting Against Another Madoff

Recently, ABC broadcast a two-night miniseries profiling the life and crimes associated with the $65 billion Ponzi scheme perpetrated by Bernard Madoff and his henchmen.

The miniseries tore open financial and psychological wounds still trying to heal from the past several years. A friend of mine, Peter, emailed saying, “After watching this, it makes me want to bury all of our money in the mattress. I feel like no one can be trusted.”

Peter is not alone in his sentiments. However, instead of burying your hard-earned funds in the mattress or backyard, a few steps can logically and functionally assist investors in protecting against a Madoff-type situation.

  1. Follow the money. No one works for free and generally you can identify conflicts of interest by tracking the flow of money. As such, does an advisor work on commission or are they a fee-only advisor? If paid on commission, know that different products pay different commission levels. There can be an incentive for an advisor to recommend one product over another. There is also a difference between being a “fee-only” advisor in comparison to a “fee-based” advisor. Although the terms sound similar, they are not. A fee-based advisor will charge a percentage of assets plus a variety of commissions.
  2. Request, in writing, all of the ways that an advisor, or their firm, will get compensation or benefit from managing your money. Some firms offer up ski or golf trips for pushing certain products. If they will not spell it out in plain English, walk away.
  3. Does an advisor have a fiduciary mandate or a suitability standard? Different investment advisors have differing levels of care owed to a client. A fiduciary is legally obligated to do what is in the client’s best interest—and not just sell them a product. If an advisor is not a fiduciary, determine how that will affect you.
  4. Get statements from a reputable firm. Crooks like Bernie Madoff were able to keep their clients in the dark since Madoff was not only the advisor, but also owned the brokerage firm where client money was held. This made it easy to alter brokerage statements to say what Madoff needed them to say to keep the scam going. In comparison, our clients get statements and trade confirmations directly from Charles Schwab or TD Ameritrade—a third party custodian. That gives clients a much better audit trail. Although Schwab or Ameritrade may like us, they are not going to risk prison for us by falsifying statements.
  5. Nothing is “risk free.” I don’t care what you invest in, whether US Treasury bonds, CD’s or stocks--they all have elements of risk. If someone tells you their investment strategy is “risk free”, run for the hills.
  6. Is it too good to be true? In the case of Madoff, his “returns” magically reported returns of about 12% year-in and year-out. No investment delivers returns of this nature with no volatility. Anyone who tries to tell you otherwise is selling you a story.
  7. What is the goal? Every person is different and deserves an investment program that complements their goals. At a minimum, this requires knowing how long you can invest your funds, how much volatility you can withstand, how much income you require, etc. Establishing a good relationship with an advisor requires you to know what your destination is.
  8. Do a background check. Whether through FINRA, the insurance commissioner, state securities board or the SEC, there are many ways an advisor can be checked out. Determine if there is a pattern of being sued or sanctioned.
  9. Identify termination fees. Not all relationships will last. If you move on, are there termination fees which may hold you hostage?

This offers a good starting point. However, as with all things, a good deal of common-sense and regular monitoring is necessary to avoid the pitfalls and keep your investment plan on target.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.

Originally published February 19, 2016, Victoria Advocate