What it all boils down to basically is the axiom:
"If it sounds too good to be true, it probably is"
Follow that axiom and you'll do fine. There are plenty of folks out there who want to take your money. Be careful.
Madoff scandal teaches valuable lessons
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If anything can be learned from the scandal surrounding former financier Bernie Madoff’s spectacular fall from prominent investor to convicted felon, it is this: Know your financial advisor.
Thousands of Americans learned that lesson the hard way when they entrusted their money to Madoff, sentenced Monday to 150 years for masterminding a Ponzi scheme that lasted more than a decade and resulted in an estimated $65 billion in client losses.
Local financial advisors suggested residents do their homework and offered tips on how to ensure they deal with a legitimate investor.
“If it sounds too good to be true, it usually is,” said Bruce Ruud of Bruce Ruud and Associates, which specializes in employee benefit plans.
One of the first warning signs is an investor promising much higher returns than what the rest of the market is generating, and Rudd said people should know where their money is being put.
“Looking at what assets are supporting the investment is very important,” said Ruud, who spent 30 years with the IRS and U.S. Department of Labor. “Rather than just looking at a monthly or quarterly statement and seeing what percent you have made on your investment, you should ask for information on what the underlying vehicles for your money are.”
Don Miller of D. L. Miller Financial Services agreed, saying clients have a right to be informed about how the market worked.
“The role of a financial advisor should be to educate the client,” said Miller, who manages investment portfolios. “I do not do any trades unless I touch base with the client and get their approval, and I want them to understand it before they approve it. You can do a lot better for yourself if you understand what you have and why you have it; and as time goes on, you get smarter about what you are doing.”
Additionally, Miller said spouses should be equally informed of their investment situation in the case of a death.
“I’ve had some wives come to me in the past after their husbands passed away, and they had no idea what investments they had, and that is a terrible feeling,” he said.
Jim Wissmiller, a financial advisor with Edward Jones in New Braunfels, said if people remember a few basic rules, they should be able to avoid being taken for a ride.
“Make sure you know who you are dealing with, diversify, and stick with top quality investments,” he said.
Wissmiller recommended potential investors look at large, well-known companies and blue chip stocks that receive top ratings. Diversification can stave off a total wipeout, he said. A number of Madoff’s victims invested their life savings, but Wissmiller advised putting no more than 5 percent in any one investment.
Investors can check with state and federal regulators to verify their financial advisor is certified and properly licensed. However, the Securities and Exchange Commission conducted several unsuccessful investigations into Madoff’s activities before he was finally brought to trial.
“The SEC definitely has a black eye with respect to that,” Ruud said. “That being said, I think the U.S. Congress, the Treasury Department, and the Obama administration understand this is a good time to strengthen oversight and regulation of people who are selling and creating investments.”
