How to Steer Clear of Shady Advisers Article
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By MARY PILON
Bernard Madoff's alleged Ponzi scheme took a devastating toll on scores of victims. But any investor can draw important lessons from the tale of the disappearing $50 billion. Here's a guide to protecting yourself when you choose a financial adviser.
Be wary of guaranteed returns. Mr. Madoff allegedly wooed many investors by promising consistent returns regardless of market activity. Also be wary about promises of speedy returns. If something sounds too good to be true, it most likely is.
Reputation and referrals aren't enough. Mr. Madoff was a former Nasdaq Stock Market chairman and fixture on Wall Street -- it's understandable that people felt comfortable with him managing their money. Many investors are happy if they just have an adviser a friend recommends.
But don't make a decision based on the good things you hear. Check credentials and verify certification with the Financial Industry Regulatory Authority (Finra), which issues licenses for financial advisers.
You should seek out other information, too. The U.S. Securities and Exchange Commission (sec.gov) lets you search Investment Adviser Public Disclosure forms online, which give information about advisers' business affiliations and any disciplinary actions. Finra also has background information on approximately 660,000 currently registered brokers and 5,100 currently registered securities firms. The information on both the SEC and Finra sites are available at no cost to the public.
Demand transparency. It's your money, so you have a right to know where it's being invested. Ask lots of questions about your allocation and your money manager's past performance. And set aside time to read through your brokerage statement -- most firms send one a month -- and make sure you're clear on everything documented in it.
Make sure you get a statement from your adviser's firm, not your adviser. There are claims that Mr. Madoff cooked his books. A firm is less likely to do that, since it's accountable to more parties. Likewise, you should be wary about writing checks directly to your adviser. They should go to a registered investment company.
Get it in writing. Make sure that both your investments and their explanations are spelled out in writing, for future reference. While you're at it, read the fine print -- and be extremely suspicious if there's no fine print to read.
If you've been a victim of fraud or are suspicious, report it. The SEC has a tip and complaint form on its Web site, sec.gov/complaint.shtml.
Write to Mary Pilon at mary.pilon@wsj.com
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