Investment lessons culled from Madoff

Marketplace Staff Dec 4, 2009

Investment lessons culled from Madoff

Marketplace Staff Dec 4, 2009


Tess Vigeland: Next week marks one year since the arrest of a Wall Street titan. A man who once served as chairman of the Nasdaq, a prominent philanthropist.
Someone whose investment firm was so wildly successful that clients never bothered to check the books.

Bernie Madoff is now serving a 150 year prison term after pleading guilty earlier this year to the biggest Ponzi scheme in U.S. history.

David McPherson is head of the financial planning firm Four Ponds Financial. And I asked whether he thinks we’ve all learned our lesson or will we see more Ponzi schemes down the line.

David McPherson: Sadly, there will always be cases like this. It’s, I guess, human nature, but I do believe that individual investors are being more careful in showing a healthy degree of skepticism that maybe they weren’t a year ago.

Vigeland: Is it possible to say where you should begin your skepticism? I mean, when you’re looking at your returns, how do you know what is too good to be true?

McPherson: Well, the best thing I think any individual can do is basically adopt the attitude “trust, but verify.” I think if you’re working with a financial advisor, even if you have total confidence in them, you should be looking over their shoulder. That’s what I actually encourage my clients to do. I don’t want them to have the least bit of doubt as to what I’m doing and so I encourage them to check their statements and look at their accounts online, to see what kind of activity’s taking place. Probably the single best defense is to monitor things, no matter how much faith you have in your advisor.

Vigeland: Well, if you’re telling your clients to be looking over your shoulder, can you give us an idea of what kinds of questions investors should be asking to make sure they are not being duped?

McPherson: The first question you should ask an advisor that you’re going to work with is, “Who’s my custodian?” Now, a custodian is a independent, third party firm that actually holds your assets. So that the advisor may be managing the account, but they shouldn’t also at the same time have custody of your assets.

Vigeland: All right, question number two?

McPherson: Question number two is “How do I check my accounts online?” You know, personally, I wouldn’t do any business with a firm that doesn’t provide you with online access to your accounts.

Vigeland: But what about the investors who say, “Look, I don’t know that even if I had access and was able to look online, that I would know what I should be looking for.”

McPherson: Right. What I would look for is any signs of money being removed from the account. Now there are many legitimate reasons why money would be coming out of the account, but look at specifically, the signs that money came out of the account and then try to figure out what was the reason for that.

Vigeland: You know, it sounds to me like if we’re looking at the broad lesson, it’s that you’ve got to have your hands in your investments. You’ve got to be paying attention and have at least a mildly active role in what’s happening with your accounts.

McPherson: Certainly, I don’t think you want to be totally hands off, because after all, it’s your money

Vigeland: But wasn’t that the case with quite a few of Madoff’s clients?

McPherson: Yeah, many of them were hands off, but they were also getting statements that were misleading, so it may have been hard for some of them to detect what was going on. Maybe you’re not comfortable making investment decisions and that’s why they go to a third party. But even if that’s the case, you should still be looking at the statements, going online, just to see what’s happening. You know, many times you’ll have questions that are entirely legitimate and the activity’s legitimate, but you should have some idea of how your accounts operate.

Vigeland: David McPherson is a personal finance commentator and the founder of Four Ponds Financial in Massachusetts. Thanks so much for your help today

McPherson: Thank you, Tess.

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