Madoff Lessons

January 5, 2009
Special Feature

If reviewing your portfolio results gives you acid indigestion, you can at least be glad if you’re not one of Bernard Madoff’s clients, almost all of whom are down 100% instead of the mere 40% or 50% that most stock investors are out this year.

If reviewing your portfolio results gives you acid indigestion, you can at least be glad if you’re not one of Bernard Madoff’s clients, almost all of whom are down 100% instead of the mere 40% or 50% that most stock investors are out this year. Madoff’s alleged $50-billion Ponzi scheme has many Wall Street veterans asking the question: How can so many otherwise intelligent investors be so dumb?

Investors are often counseled that, to avoid Madoff-like scams, they should deal only with money managers who have been in business for a number of years and come with gilt-edged credentials. That advice probably would not have helped Madoff’s victims, since he was a former chairman of NASDAQ and had been in running a investment management business for almost 50 years. Other common-sense suggestions for avoiding financial scams could have worked, however, including being leery of returns that look too good to be true. Experts say investors should have been suspicious of Madoff’s reported returns, which averaged 10% a year even in the face of down markets.

Other red flags that should alert you to potential fraud are a money manager who wants complete control over your portfolio or wants checks made out to him/her or to a company he/she owns. It’s a good idea to keep your cash with a reputable broker like Fidelity or Charles Schwab and give your financial advisor access to it only with your permission. Also, watch out for a investment manager who “guarantees” market-beating performance or sports a remarkably steady rate of return over a long period of time.