How to Avoid Investment / Financial
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News of the Bernard Madoff, Allen Stanford Financial
Grp and other scandals has provided ample evidence
that financial fraud against investors is alive and well.
It’s always a good time to review some of the
principles that will protect one from investment /
financial fraud. Let’s take a look.  

Of course, the first and foremost is having a
trustworthy investment advisor and company. Know
your investment company.  A quick check on the
Internet* can highlight any major problems or
complaints your company may have had with the SEC
or other government bodies.  Many companies may
show complaints against them. Carefully evaluate
them to determine if your company’s business
problems /policies are such that you don’t want to do
business with them.

A similar investigation can be done for your specific
broker / financial advisor. If you find serious
complaints with merit it’s time to move on.  Interview
your financial advisor. Of course they should be
knowledgeable about the investment market place,
asset class allocation, as well as specific financial
products. They should also be able to explain their
firm’s practices with regard to the money flow from
their firm to their broker dealers and clearinghouse
(see below). They should also be able to clearly
explain their fee structure.  Is your broker/advisor
knowledgeable about theses practices? Or are they
more of a salesperson, trying to steer you towards
their own firm’s products? Of course, that doesn’t
means there is fraud going on, but the less credible
the information on these topics is, the more likely you’
d be better off investing your money someplace else.  

You should be able to track your reported investment
returns relative to the returns observable in the market
for a similar class of investments. For example, if your
funds are being invested in value stocks (stable
steady growth profile), and your financial statements
claim to be beating the S &P 500 by leaps and
bounds, you might want to wonder how your
investment company is doing it. They may well have
beaten the market. But it is worth investigating. They
should be able to provide you with a list of securities
in which they had your money for a given period, or a
list comprising any given fund. You can check one by
one what the performance of those securities was,
and if it roughly matches (in aggregate) what they are
telling you. It’s a big red flag if the numbers aren’t
close. And a bigger red flag if your company tries to
avoid providing any of this information.    

The size of your investment company is not
necessarily an indicator of quality, but I believe it is
true that the larger companies are monitored more
closely and less likely to foster systemic fraud.  Of
course, Bernard Madoff controlled and stole many
billions of dollars, but the biggest problem there,
besides lax SEC oversight, was that there was only a
tiny core of people who truly knew where the money
was invested. There was not adequate (or no)
separation between the investment advisory function,
the actual securities trading, the movement and
reconciliation of the underlying money. This is much
less likely to happen in a large publicly traded and
audited firm.  

As touched on above, all securities purchases on your
behalf should be cleared through an independent
custodian/clearinghouse. A of the financial statements
sent to you should be periodically be examined by an
independent auditor. If you don’t know who these
institutions are for your investment company, you need
to find out.  

Many people invest their money with specific brokers
based on references from friends and family. While
this is generally a good thing, your broker still needs
to pass the above tests. Don’t be afraid to ask.
Remember, many of Madoff’s victims fell into this trap
by being referred by those they knew. Those others, in
turn, based their judgment based  on fraudulent
investment statements. In addition, most of these
people did not ask the underlying questions. If they
had, they wouldn’t have gotten adequate answers,
and could have moved on before it was too late.  

Lastly, it is always advisable to spread your money
among a number of different advisors / investment
companies, in case there is a problem with any one of
them. This is outside of the normal diversification of
actual asset classes, which can be done within one
firm. I recommend splitting your funds among at least
three different, unaffiliated advisory/investment
companies, depending on how much money you

Once you’ve taken the necessary steps to protect
yourself, you can concentrate on the much more
interesting and primary task at hand. That is, putting
your money to its best use through the proper
identification of your investment goals, and identifying
and making the best investments!

* search for your company and SEC for example
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