Earlier today, the famous fraudster Bernie Madoff died in his jail cell.
Here’s a quick synopsis for those of you who aren’t familiar:
Madoff pretended to be an investment advisor, while he was actually running the world’s largest Ponzi Scheme. He would tell his investors that he ran a very sophisticated options strategy, wouldn’t ever divulge details of the strategy, and told all of his clients that his investments (and their money) were generating double digit returns, while never having a down year.
The returns, of course, were fake, and were made up of fake account statements. And when his investors wanted some of their money, he would simply give them the money of his newest investors. He continued this cycle until he was turned into the FBI by his sons.
He was turned in in 2008, and sent to live the rest of his life in jail, until his death this morning. In total, he ripped off tens of thousand of people, which totaled over $65 billion dollars.
Stories like this are heartbreaking, for the families whose financial and emotional lives were upended and harmed by this monster.
This story is also a good reminder to take protections with anyone you work with, especially when it comes to your financial life. Today, I want to share with you three lessons that you can use if you ever work with someone in your financial life (like a financial advisor).
1. If It’s Too Good To Be True In Terms Of Investment Returns, That’s Because It Is.
Madoff told his investors that they were getting double digit returns, while experiencing very little volatility in their portfolio. In other words, they got the ups of the market, without the downside that comes with it.
That type of investment simply doesn’t exist, and if someone promises you something like that (which is too good to be true), that’s because it is.
2. If Your Investment Strategy Can’t Be Easily Explained, Don’t Invest
Madoff was often approached by potential investors about how he generated such high returns without subjecting the portfolio to much of any risk. According to those that were in these conversations, he was always vague, and never offered a clear, concise accounting of what his strategy was or how it worked, or even the actual data behind the investments.
If someone is not going to clearly outline what your proposed invest strategy is, or how it has performed in the past, run for the hills.
3. Use A Third Party Custodian
This one was essential for Madoff’s scheme. In essence, when a new investor hired him, that investor would make a check out to Madoff’s investment company, and then they would “invest” that money. Which meant that Madoff, and his team, could take that check and do what they wanted with it. You never want that when working with a financial planner; you should only work with one who has a third party custodian (like TD Ameritrade, Fidelity, etc).
For instance, my clients have their money at TD Ameritrade. When they move money into their accounts, that check is made out to TD Ameritrade. That check for your investment account should never be made out to your Financial Advisor, ever. This acts as an important barrier so that your financial advisor can’t improperly use your funds.
In addition: The third party custodian will be the one creating and sending your statements, which means that you won’t have to worry about a fake account statement, which Madoff was creating in his “company”.
If you ever choose to hire a financial advisor to help you in managing your money, please make sure to follow these three lessons we’ve learned from the Madoff tragedy. And if you have any questions on this subject that you’d like clarity on, feel free to respond and I’ll do my best to answer your question.
All my best,
Scott Newhouse