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10 Ways to Spot Financial Scam Artists

Inspiration for my newsletter comes in many forms. This issue, I have Robert De Niro to thank.

This past weekend, I put my feet up to watch The Wizard of Lies, a recently released HBO drama starring De Niro as financier Bernie Madoff. De Niro delivered a riveting performance (as usual) that earned him a 2017 Emmy nomination for best lead actor in a drama.

I’ve detected a post-Bernie Sanders cultural shift in movies and television: it has become more common to condemn, rather than admire, Wall Street. The fiercely independent strategists at Investing Daily certainly aren’t fans of the financial establishment. In fact, we help you make money by routinely betting against the conventional wisdom of the investment herd.

Now rightfully rotting in jail, Madoff bilked his trusting clients out of billions of dollars. Watching De Niro play Madoff got me to thinking: how many other Madoffs now operate undetected?

Below, I provide 10 actionable steps to keep the fraudsters away from your money. I’ll get to my advice in a minute. But first, let’s look at the growing phenomenon of financial crime and how it affects individual investors like you.

The financial crime wave…

It’s not just the highly publicized crooks such as Madoff; a lot of ordinary brokers and financial advisers don’t have their clients’ best interests at heart. It reminds me of the joke about a naïve newbie at a brokerage firm being shown the yachts of the partners in the dock. He asked: “But where are the customers’ yachts?”

The latest annual survey of state and local consumer protection agencies conducted by the Consumer Federation of America and the North American Consumer Protection Investigators finds that the prevalence of financial rip-offs has reached epidemic proportions.

Perhaps it shouldn’t have come as a surprise that U.S. Labor Secretary Alexander Acosta allowed the Department of Labor’s contested fiduciary rule for retirement accounts to become applicable on June 9.

Fiercely opposed by the financial industry, the rule declares that brokers can no longer earn commissions and other forms of conflicted advice compensation from consumers, unless they sign a Best Interests Contract agreement with the customer, which commits the advice-provider to a fiduciary standard of giving advice in the “best interests” of the client, earning “reasonable compensation,” and providing full disclosure and transparency about the products and compensation involved.

But you’ll need more than the fiduciary rule to protect you. According to news stories that have surfaced in recent days, many mainstream publications have been conned for years into running stories by writers (some with fictitious bylines and biographies) who pretended to be unbiased financial analysts but who were in fact paid by interested parties to facilitate “pump and dump” stock schemes.

Jim Pearce, chief investment strategist of Personal Finance, sounds the alarm about the dishonest financial advisers in the media:

“Simply because articles show up on credible websites such as Yahoo Finance does not necessarily mean they are legitimate; almost all of them are written by unaffiliated parties that may or may not have a hidden agenda.

Consequently, before making an investment decision based on a news story, it’s critical that you understand who has written the story and any potential economic interest that party may have in the subject of the article.”

Madoff the monster…

All of which brings me back to Bernie Madoff. He seemed like a guy you could trust — a mensch. An experienced stockbroker, he once served as chairman of NASDAQ. His wealth management company, Bernard L. Madoff Investment Securities LLC, boasted of consistent, market-beating gains, enticing an enviable roster of rich and famous clients. He seemed to take pleasure in helping clients, employees and charities.

But the mensch was a monster. As the world now knows, Bernard L. Madoff Investment Securities was a Ponzi scheme on a mind-boggling scale. Uncle Bernie, as people called him, stole an estimated $50 billion, making it the largest financial fraud in U.S. history.

Once known for a lavish lifestyle, Madoff is now serving a 150-year sentence in the super-max wing of New York City’s Metropolitan Correctional Center. Madoff’s new Manhattan home is the size of a walk-in closet, with cinderblock walls and a bunk bed. His fellow inmates are hardened mobsters, killers and terrorists.

The essence of Madoff’s scheme was simple: he deposited client money into a Chase Manhattan bank account, rather than invest it. When clients asked for withdrawals, he used the money in the Chase account that belonged to them or other clients to make good on the requested funds.

Among Madoff’s victims were scores of celebrities. But you don’t have to be famous; it could happen to anyone. Lots of Madoffs still lurk out there, ready to pounce on the unsuspecting.

10 ways to avoid a shakedown…

Here are 10 tips to avoid getting ripped off by a financial adviser:

  1. Verify the existence of a third-party custodian.

When you write a check to a financial adviser, the check should go to an independent custodial organization. Typical examples of a custodian would be a major brokerage firm, such as Charles Schwab, T.D. Ameritrade, T. Rowe Price, or Bank of America’s Merrill Lynch. Obtain the name of the firm and its contact information; make sure it exists and it’s receiving your money.

Madoff’s investors received their statements directly from Bernard L. Madoff Securities — and that should have been a red flag. Madoff simply created a counterfeit paper trail, with bogus receipts.

  1. Make sure an independent auditor is involved.

Ask who audits your adviser and make sure they’re legitimate and duly licensed to operate in your state. Madoff used a small, unknown accounting firm that was beholden to him, which created a conflict of interest. In return for its fees, the minor league auditor looked the other way.

  1. If your adviser has recently switched accounting firms, determine why.

New accounting firm? That’s another red flag. If your adviser has dumped his accounting firm, maybe it was because the accountants responsible for verifying the books felt uncomfortable and had been raising a stink.

  1. Do your homework; investigate the adviser’s background.

Conduct background checks of your adviser, starting with the Financial Industry Regulatory Authority, which regulates the financial advice industry. They’ll let you know if there is a history of sanctions, disciplinary actions or client complaints against your adviser.

Also consult online reviews from other advisers and traders, which can give you insights into a wealth management firm’s strengths and weaknesses, as well as its integrity.

  1. Be suspicious of a client network held together by a common culture.

Fraudulent advisers find it easier to fool clients by making appeals to their group identity, whether it’s religious or ethnic. You should remain dispassionate and not make investment decisions based on emotional ties.

The infamous financial crook Charles Ponzi preyed on the Italian heritage of his victims. Madoff played the “Jewish card” and attracted a clientele heavily comprised of high net worth individuals from Jewish charities, businesses and philanthropic foundations. In particular, many members of New York’s Upper East Side elite had plowed their life savings into Madoff’s firm — and lost everything.

  1. Verify all academic credentials and professional certifications.

Many employers don’t fact-check resumes of job candidates, a lazy practice that they usually end up regretting. It’s easy for someone to say they graduated from Harvard or earned a certain professional certificate.

Don’t take your adviser’s word on anything; check his background. If he cites an Ivy League education, give the university a call to make sure it’s true. You’d be surprised at how brazenly some people lie about their academic record.

  1. Make sure you understand the adviser’s management strategy.

Don’t blindly accept any assertion that your adviser has a foolproof way of making money. Learn his or her game plan. Madoff handed his gullible clients big returns every year, even during market slumps. They took it on faith that he had a magic touch with money, when in fact he was hiding losses. Also, make sure you read the fine print of any agreement. Hidden fees and costs can add up.

  1. If you’re unable to withdraw money, call the financial cops.

If you attempt to make a withdrawal and you’re told that you can’t, immediately contact the SEC or the FBI. That’s when Ponzi schemes fall apart — when investors try to take out their money but there isn’t enough to go around. Unfortunately, by this point, it’s usually too late to get your money back.

  1. Be suspicious of extremely low management fees.

Top-tier wealth managers who are legitimate typically charge hefty fees and commissions to their well-heeled clients. If a prospective adviser’s come-on includes bargain basement rates, it’s a warning sign that he or she has figured out other ways to get their paws on your money.

  1. Don’t be swayed if the adviser touts associations with the rich and famous.

Associations with movie stars and high-profile charities don’t make you money and they’re just meant to dazzle you. Name-dropping is no substitute for solid financial acumen and performance. Besides, if you dug deeper, you’d probably discover that the celebrity ties are tenuous at best or bogus at worst.

Tell Us Your Story

Want straight, honest answers to your investment questions? You can reach me at:

I sometimes edit letters for the sake of concision and/or clarity, but revisions are kept to a minimum. And I never reveal last names.

In particular, do you have any personal tales to tell about financial scams that affected you? Let me know. As a public service, I’d like to share your story with readers.

As the Madoff scandal showed, regulators are falling down on the job. By keeping a spotlight on fraud, the Investing Daily community can make a difference. — John Persinos


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