With the alarming rate at which Ponzi schemes are being revealed within the global investment community, I would like to reflect on this matter in depth.
Let me start with a quote from Warren Buffett.
“It’s only when the tide goes out that you learn who’s been swimming naked.”
So as the world financial markets continue to ebb, we unfortunately see who is swimming without their trunks.
The quote below is from my broker/Dealer, KMS Financial Services, Inc. Seattle Washington.
“With all the media attention surrounding Bernie Madoff’s great (alleged) Ponzi scheme, astute clients have probably given at least a few moments’ thought to the questions: “How do I know that my investments are real? And how do I know that my advisor isn’t another Bernie Madoff?”
In the early 2000’s I had a client call me and state that he could earn a one year high rate of return, guaranteed, and would I research it and ‘ok’ it for him. Upon gathering more information on the ‘investment’, I quickly called my legal department within my broker/dealer as this was another ‘too good to be true’ story. Yet the client was blindsided by the promise of the ‘investment offering’ by someone in the local community.
I next performed a conference call with the client and my legal department coaching the client regarding pitfalls in that bold offering. Additionally I created yet another conference call with the State of Oregon regulators for all investments along with my legal department giving the name of the firm offering such an investment. The account was closed in spite of our collective efforts. I am reminded of this event as today I read about yet another investment fraud that has happened here locally in Portland, OR.
Let me offer a review on several aspects of my practice to reflect on the level of transparency that should present for any and all investors.
For starters, clients do NOT make checks payable to my business entity or me. They’re made payable to KMS or to the entity (fund group, custodian, insurance company, trust company, etc.) where their investments are held. A client can then see that entity’s endorsement on their cancelled check.
Confirmations and subsequent statements invariably include information on the entity holding the client account(s). Those entities generally can be reached (and researched) independently by phone and online. Those entities should recognize the client’s account and be able to verify the information on the statement.
Clients of David Gratke Wealth Advisors, LLC have access to their accounts online 24/7 via this link:
http://www.davidgratke.com/yourAccount.html
Another indicator of legitimacy is the protocol for getting money OUT of accounts. Clients are sometimes frustrated by strictures such as sending checks only to the address of record, requiring signature guarantees, and prohibitions on third-party wires. But these are the indicia of a bona fide financial institution protecting client funds (and the institution) from common fraud, rather than perpetrating fraud itself.
Yes, all these paper statements; procedures, apparently separate entities, toll-free numbers, and websites are all a part of the transparency process that assures genuine investment processes and procedures. Investors may also access the Financial Industry Regulatory Authority, Inc. site as well to review their investment providers.
One additional thought regarding the Ponzi schemes; too often when someone has been a victim of such schemes I read, or hear on television, how the victim had all his/her assets with just ONE money manager! I cannot believe this. As a Wealth Advisor, my client’s assets are typically invested across as many as 10 to fifteen asset classes at one time; each asset class is managed by a separate money manager. For this, I find the concentration of wealth by the victims, well, inexcusable.
Below is a pie chart of one current asset allocation I am using for clients. Each piece of the pie is a distinct and separate manager from the next.
As a refresher, my blog posting from 2008, Dave, how do you construct investment portfolios? is provided to offer greater detail in my investment process.
Final thoughts.
So, be smart, be cautious, and if it seems too good to be true, trust your gut; it probably is.
Addendum:
The deep roots of the Madoff scandal (click this title to launch video)
The link above will launch a nine minute video from BBC World News on the Madoff scandal.
Information below from: Seeking Alpha, December 19, 2008, Bespoke Investment Group
If You Ever See a Chart Like This, Run Away Fast
We’ve all heard how Bernie Madoff’s returns sounded too smooth and consistent to be true. In picture form, however, the returns are even more eyebrow raising. The chart below shows the cumulative returns of $1 invested in the hedge fund Fairfield Sentry Limited, which was a fund run by Fairfield Greenwich Group that essentially directed all of its assets to the stewardship of Bernie Madoff.
As shown, $1 invested in Madoff back in 1990 was supposed to be worth $6.75 today. NPB Bank, out of Zurich, even offered a version of this fund with three times the leverage. Talk about too good to be true.
Here’s the S&P 500 index for the same time period as the chart above.
New York Times Article on Madoff and Standford, and the Red Flags (click here to launch article)
