Protecting Yourself from Investment Scamsters

Bernie Madoff may have gone to jail, but if you think we've seen the last of fraudulent investment schemes, you could be setting yourself up to become the next victim. Stronger regulations are in the works, but there are some basic steps you can take to help protect yourself and your family.

Know where your money is going

One of the reasons Madoff was able to avoid exposure for so long was that his firm acted as both investment advisor and custodian of his clients' assets. His clients wrote their checks directly to Madoff's firm rather than to an independent custodian. As a result, there was no outside verification of whether he was actually making the trades he claimed. Checks should generally be written directly to a custodian firm that also is involved in processing your account statements.

Know where your money's going, part 2

Don't invest purely on the basis of returns; understand what you're investing in. Because people were so anxious to invest with Madoff, he was able to deflect questions about how he achieved his results (a fairly simple process, as it turned out--he lied). Most of Madoff's investors didn't know or care what a split-strike conversion was as long as it supposedly produced the returns Madoff promised (people who did understand the strategy were the first to question whether his returns were real). You don't have to become an investment genius to have a fundamental grasp of what you're invested in, how it works, and what the potential risks and rewards are.

Do your homework

A recommendation from an acquaintance may be a good starting point for research, but it shouldn't be the sole factor in your decision-making process when choosing investments or an investment professional. Being popular or well-known doesn't necessarily make someone the right person to handle your finances.

Though it might not have red-flagged Madoff, Form ADV can provide background information about a registered investment advisor. Part 1 of the form can be found at www.adviserinfo.sec.gov; Part 2 must be supplied directly by the advisor and includes information on services, fees, and investment strategies. The Financial Industry Regulatory Authority (FINRA) website's BrokerCheck allows you to confirm broker licensing and check on any history of disciplinary problems. Information about insurance professionals is available from the individual states.

Take advantage of multiple resources

Madoff used reverse psychology; the more difficult he made it for people to invest with him, the more they wanted to do so. If you question or don't understand advice from one financial professional, you should feel free to consult someone who can help you make sense of what's being proposed for your money. You might also want to consider using multiple investment managers, each of which may specialize in a specific investing style or asset class.