ARE YOU A MADOFF $50 BILLION VICTIM?
It’s been a shocking headline for the past month. Bernard Madoff, former Nasdaq chairman and respected advisor to numerous celebrities and charitable organizations, has been charged with orchestrating a $50 Billion Ponzi scheme for several decades. Madoff’s client list consisted of high-profile so called “sophisticated investors”, which were accepted into his fold on a referral invitation only basis. Fortunately we live in rural America far removed from the unscrupulous financiers that stalk Wall Street and the glitz of the big city. Unfortunately, some mutual fund managers fell prey and invested portions of their funds portfolio with Madoff. Hopefully, your fund manager resisted the “Too good to be True” temptation. The pieces of the puzzle are yet unraveling.
An article published on msn.com a week ago addressed the issue “If the rich, famous and sophisticated can get bilked (and the Madoff scandal makes it clear they can), how can you know whom to trust? The article goes on to offer several suggestions to prevent becoming a victim:
- Background check: The SEC (Securities and Exchange Commission) maintains a public database on-line where investors can search for information on investment advisors and brokerage firms which list any actions, charges, court filings or arbitration awards. The address is www.sec.gov. To test the site you can find our information listed under our firm name “1st Securities Management, Inc.” Virtually anyone can call themselves a financial advisor, investment advisor, or financial planner. You need to know who you’re dealing with and the experience and credentials they possess. You need to know where to find your advisor when you have questions and need answers.
- Understand your Strategy: Many of Madoff’s investors ultimately admitted they never understood his investing strategy, but because they were making money many believed Madoff was simply smarter than they were. You may not need to understand all the intricate details or the complex formulas but you absolutely need to understand the underlying concept. This relates to being able to answer this relatively straight forward question about your investments, “Do you know what you’re doing, and why?” If you can’t honestly answer “Yes” to this question, you need to question your advisor until you do, or find a new advisor. It’s a new twist on an old proverb, “If it seems too good to be true, it probably is.”
- How is your advisor paid: Your advisor should be paid by you not some big brokerage firm. Otherwise, don’t expect them to work for you. Advisors who earn commissions for selling certain financial products have a strong incentive to base their advice on what makes them money, not what’s best for you. Conversely, an advisor who is paid a fee, or percentage of profits, has a stronger incentive to generate returns for you.
- No one else is watching: Madoff was able to avoid detection for a long time because his company handled the cash, invested the cash, cleared the transactions through his own firm, and prepared the investor reports stating the fictitious cash in their accounts. Investors can protect themselves by making sure that their investments are held by a independent custodian, cleared by a outside entity, audited by a reputable firm, and receive investment reports prepared by someone other than their advisor.
- Your advisor doesn’t invest alongside you: If you advisor believes in his/her strategy, they should be invested in the same manner and methods they recommend to you. Investors should ask how much of their advisors wealth is invested alongside you. This will tell you if the advisor has his interest aligned with yours.
To properly protect yourself you need to educate yourself about how markets work and adopt an investment philosophy that matches your beliefs. Additionally your advisor should have prepared a risk tolerance assessment so that your emotional tolerance during market downturns is properly aligned with the exposure to risk in your portfolio. This is exceedingly true today given the extensive and extreme down market we’ve been experiencing. How many times have you heard family, friends or loved one’s say, “I didn’t know I could lose that much!” If you didn’t how much risk was in your portfolio before, chances are, you’ve now found out the hard way. It requires a commitment of your time and effort to understand your investments. You’ll be rewarded with greater peace of mind concerning your investments and you’ll sleep better during the intervening period.
Watch for the premiere of our upcoming movie “Navigating the Fog of Investing,” it’s a must see if you’re serious about growing your wealth and achieving true peace of mind about your financial future. If you’d like more information about how markets work and our academic based investment philosophy contact our office. You can’t blindly entrust your financial future to anyone else, it’s up to you!
Run Date: 01/16/2009
