Looking Out for Mr. Ponzi

This summer Bernie Madoff will be celebrating his 4th anniversary in federal prison, 146 years to go. Madoff masterminded the largest Ponzi Scheme (slang for financial scam) in world history.  Thousands of unsuspecting investors were swindled.  In many cases, ordinary people lost their life savings.

Having had such a long prison sentence imposed, you would think that other financial fraudsters would find some other line of work.  Not a chance!  Financial fraud is too easy, and trusting investors are falling prey to new Ponzi Schemes each and every day.

So, how do you spot a Ponzi Scheme? While not fool-proof, here are a few of the red flags to be on the lookout for signs a scheme could be in play.

• First and foremost, be very aware of rates of returns that are unusually high and unrealistically consistent.

Should you hear promises of 15% or more as the norm, don’t you believe it! If you are told that there is never a down year, be very, very skeptical.  It has been proven time and time again that, in the short term, the stock markets are random.  They could go down, as well as go up.  Over the long run, however, the markets historically have risen. “Think” walking a flight of stairs, while playing with a yo-yo.  The market has always hit new highs. That is why the science dictates, have a long-term time horizon in our investment portfolios.

•Never, ever make out your investment check directly to the financial advisor or a firm that he or she controls.

That is, perhaps, the number one mistake of Madoff’s investors.  They made out their checks directly to his business.  This is a major mistake because now he had access to their money. All investment checks should always be made out to a third party custodian; Examples might be Charles Schwab, Vanguard, or Fidelity.

In the industry, we call this “taking custody.”  It is okay to pay the advisor’s firm directly for a financial plan, providing the firm is a Registered Investment Advisor with either the State or the Federal SEC.  The fee for a financial plan should be an amount ranging from a few hundred to several thousand dollars, depending on the scope of the plan.

•Do not give your financial advisor or broker the authority to make any changes to your investment portfolio without your express written permission.

In the industry, we call this authority “having discretion.”  If the financial professional does not have the discretion to access your money without your written permission for each and every transaction, it becomes that much harder to steal your money.

If we think changes need to be made, or if you wish to move any funds within your accounts, we will speak to you and send you the appropriate paperwork for your review, approval, and signature. This may seem like a bit of extra work on your part and on our part, but we do this for your protection.

•Check out the financial advisor or broker’s record.

Most experienced, legitimate financial advisors get a high percentage of their new clients from personal introductions.  Ponzi scheme operators know this and often use this strategy to grow their business. Talking to friends and acquaintances about their experience with a financial advisor is important.  Interestingly, however, the regulators do not permit Registered Investment Advisors to provide testimonials.  And understandably so….Do you really think that any advisor will ever provide a bad reference?

There are ways to supplement a personal introduction to a financial advisor or broker.  Check out his or her record with the regulators themselves.  They provide an easy way to do that, just go to www.FINRA.org and click on the broker-check link.  FINRA is the Financial Industry Regulatory Authority.

When it comes to Ponzi Schemes, financial fraudsters have proven to be some of the smoothest and friendliest operators out there.  You would be amazed; investors trusting their gut are swindled every day.  Better to follow the four points above.

Click on the link below to view a 4 1/2 minute video for a slightly different perspective on spotting a Ponzi scheme.


About Paul Nichols

Paul is the founder of Financial Abundance, a Registered Investor Advisory firm and EDI, an Estate Planning Firm with offices in State College and Lewisburg. He has been working with individuals, families and businesses for over twenty years, including many Fortune 500 companies. He has educated tens of thousands of people through seminars, workshops and various international speaking engagements where he shared the stage with many notable individuals such as Ronald Reagan, Robert Kiyosaki (author of Rich Dad, Poor Dad), Mike Ditka, General Schwarzkopf, and Newt Gingrich to name a few.

In 2000, after many years of traveling to consult companies and individuals, Paul decided to relocate from Colorado to State College, PA (his wife’s hometown) to develop a local advisory firm.

Paul operates under the core belief that education plus understanding leads to clarity and confidence; resulting in peace of mind. He is a proud father of three and devoted husband of 20 plus years.

Some of Paul’s accomplishments:
Regular contributor to the Centre Daily Times, via the “It’s Your Money” blog
Featured in the movie Navigating the Fog of Investing
Regular contributor to Town & Gown as the publications Investor Coach
Host of the weekly iTunes Podcast, It’s Your Money
Member of the Western PA Better Business Bureau
Member of the Centre County Chamber of Business and Industry