As an individual investor not only do you have to worry about losing your money in a sinking market, but there are also unscrupulous people out there trying to outright steal your money. After the news of Bernie Madoff broke, there have been multiple other schemes uncovered about people trying to defraud investors. 

The following are a couple of tips that can help you avoid being a victim of the next "Bernie Madoff" scheme. One thing to remember, just like identity theft, you can do everything right, yet still become a victim.  By following these tips you can lessen the chance of being defrauded.

1.      Third Party Custodian - When you deposit money into your account or hand it over to your financial advisor, the check should go to an independent custodial institution and not be made out to your Financial Advisor. Also, it might make sense to call the custodian to verify that it is indeed working with the money manager. Investors with Madoff were getting their statements from Bernard L. Madoff Securities

2.      Check up on your Advisor/Broker - It pays to use the resources of the Financial Industry Regulatory Authority (FINRA), the industry's self regulatory authority. FINRA has an easy to use broker check in the Investors section of its web site (www.finra.org). On that site you can get employment history, records of examinations passes, and also whether there have been any customer disputes or regulatory actions.

3.      Beware of Group Connections - Unsavory money managers sometimes find it easy to victimize people with whom they have religious or ethnic ties. This is called Affinity Fraud.

4.      Fiduciary Oath - ask your advisor to sign a fiduciary oath, which requires the advisor to put your interests first. It also prevents the advisor from taking a referral fee for buying or selling an investment for you.  Not only is this a good tip on how to avoid investor fraud, but it is also something to use when selecting your Advisor in general.  Under FINRA's rules a typical broker is only required to recommend investments that are "suitable" for clients.  An Investment Advisor is regulated by either the state they operate in or the SEC and is required to act out of a fiduciary duty, which is the obligation to put their clients interests first. 

Many investors do not understand the difference between the requirements of a broker and an advisor:

Advisers are legally required to act in the best interest of their client and must disclose any conflicts of interest.  Brokers often do not have to do either of these.  A broker can sell you any investment they have reasonable grounds for believing is suitable for you.

5.      Investment Returns - understand the investments that the advisor is recommending and if the returns are too good to be true, most likely something is up. The Madoff investors saw steady 12% returns year after year, no matter what the market was doing. This should have been a clue that something was not right.

By following the tips above you can lessen the chance of being defrauded.  One thing to remember, just like identity theft, you can do everything right, yet still become a victim.  

Marc Bautis is an Independent Investment Adviser specializing in working with retirees and those nearing retirement who want to protect their principal and ensure their money lasts.  He is proud to deliver independent advice, always in his clients best interest.