Madoff fraud offers lessons

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The sentencing last week of Bernie Madoff to 150 years in prison for ripping off his longtime investors of the stunning sum of $65 billion probably came as little consolation to those whose lives he ruined.

But Ponzi schemes, like the one Madoff ran successfully for decades, and other scams designed to defraud investors won't end with Madoff's incarceration. There will always be scumbags, albeit white-collar ones, trying to separate folks from their money.

Why? Because eradicating fraud is about as likely as eradicating greed. That's especially true in the high-stakes world of high finance, where the money flows and everyone is looking for the next get-rich, can't miss investment.

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It's just human nature. But if investors don't want to end up like those Madoff fleeced, they'll have to put their natural desire to make a financial killing on hold and take some simple steps to protect themselves -- and their money.

First, spend some time researching the background of financial planners, stockbrokers and other professionals. It may be a little time consuming and a little dull, but it's your money and you need to know as much as you can about who's handling it.

Derald Lahti, a certified financial adviser with Edward Jones in Village One Plaza in east Modesto, said there are plenty of Web sites with background information about industry professions. He recommended the Financial Industry Regulatory Authority's site, www.finra.org, and the Securities Investor Protection Corp. site, www.sipc.org.

If no red flags pop up, such as a regulatory punishment or worse, then it's time to examine the working relationship you have with a financial professional.

Terry Swehla, a certified financial planner at Waypoint Financial Advisors in downtown Modesto, said investors have to find someone with whom they are comfortable.

But comfortable isn't as much about dealing with someone who's nice as it is about working with someone who walks investors through even the most complicated investments, carefully explains the risks versus rewards and is willing to answer any questions.

If there's something that can't be explained or there's an unwillingness to do so, those are more red flags.

Whether it's a brake job or a financial issue, getting a second opinion is a good idea for those who want more information to ensure they are making the best decision for themselves and their money.

"I'm very concerned about this 'must-act-now approach,' " Lahti said. "Don't be pushed into a quick decision. There are no time constraints when it comes to making a well-thought-out decision."

At the same time, don't buy into the exclusivity of an investment -- just ask Madoff's clients. There is no secret road to wealth. If there were, word would leak out and everyone would be using it.

Another way investors can protect themselves is by looking at who they are writing their checks to. Swehla said checks usually should be made out to the investment fund, not the individual adviser or broker. Financial professionals are paid directly for their advice and planning services, but money for investments should go to those funds or the firms managing them.

By separating the accounting, reporting and advising, investors can make more informed decisions about what their investments are doing and what direction they want to take amid a changing financial landscape. People also need to monitor their investments on an ongoing basis, not just when there's a big swing in the stock market or some other major economic shift. It's the best way to spot problems.

Lahti and Swehla said it's also a good way to adjust investments to account for changes in people's personal and professional lives. By staying on top of things, people have a better chance of smoothing out the rough spots and transitioning from one phase of their lives to the next -- from providing the college fund to building the retirement nest egg.

There are no shortcuts to financial security or independence, though.

For most people, it's a long, slow process filled with ups and downs. What Madoff's clients forgot is the old axiom that if it looks too good to be true, it probably is, even for the wealthy.

Of course, most folks believe there's a different set of rules for those with money, especially when it comes to investing. The Madoff case likely won't dispel that, but it proves they're not immune from hubris, bad judgment and being taken advantage of.

If those with so much to lose can become victims, those with much less can, too. That's why it's so important to spend time monitoring, studying and questioning how your money is invested.

Because if you don't, who will?

Bee business editor David W. Hill can be reached a dhill@modbee.com or 578-2336.