Four Warning Signs You Could Be Dealing With a Ponzi Scheme or Other Investment Fraud
From The Truth About Money, Part XIII – How to Choose a Financial Advisor.
If you're wondering how you can help ensure that you are investing with a legitimate advisor, keep an eye out for the following four warning signs:
Warning Sign #1: Beware any advisor who prominently touts his ethics, honesty, and trustworthiness.
Honesty can be assumed; there's no reason for an advisor to brag that he's honest. By the same notion, some financial advisors invoke God as a marketing ploy by calling themselves "Christian (or Jewish or Muslim or whatever) financial advisors." Such individuals promote themselves at church groups, which can lead to a practice federal regulators call "affinity fraud." In that scam, crooks ingratiate themselves within a religious organization, group, or community in order to steal money from the congregation and its members by selling investments that purport to offer high returns and little to no risk. Madoff did this routinely, making connections with wealthy members of the Jewish community.
Warning Sign #2: Beware any advisor who offers unusually high or steady rates of return.
Every investor dreams of earning consistently high returns — which are too good to be true. Madoff 's investors received a monthly return of 1% for 18 years. He even reported a 5.6% profit for the first 11 months of 2008 — despite the fact that the stock market lost more than 40% during that time. Claims of consistently good and unusually steady returns over a long period should be viewed with great suspicion.
Warning Sign #3: Beware any advisor who uses a questionable auditor.
An independent auditor should regularly examine the advisor's books and records to ensure that clients' money is being handled properly. Madoff hired a small auditing firm that reportedly operated out of a single 13x18 square-foot office in Poughkeepsie, N.Y., even though he was handling billions of dollars in assets.
Warning Sign #4: Beware any advisor who touts testimonials.
Past performance does not guarantee future results, which is why the SEC restricts the use of testimonials. But Madoff built his entire business by word of mouth, currying favor on the social circuit at high-end country clubs.