Does Madoff make you mad?

The Madoff case it being described as the largest Ponzi scheme ever. All events, whether we perceive them as good or bad create opportunities for learning. So what can we learn from Madoff?

Andy Pulsfort, Investment Advisor at Mackey Advisors recently wrote a letter to our clients briefly describing the events and recounting lessons we all can garner from this tragic event.

Here is what Andy has to say:

Just when we were beginning to believe Wall Street couldn’t become more tarnished, the news of Bernard Madoff was unwelcomed into our homes and offices this week. The investment advisor and former NASDAQ chairman was charged with securities fraud and led away in handcuffs for it.

While the collapse of Wall Street has had dramatic effect on our country’s and our personal finances, it was driven by drifting from the financial basics:
1) Living within your means
2) Using debt wisely
3) Avoiding get rich quick schemes
4) Cash is king

Madoff’s case was illegal and deceptive. His firm accumulated a $50 billion loss for investors by collecting money from clients, investing them in counterfeit investment plans (with bogus statement to boot), and using new investor money to pay out any interest and withdrawals to existing clients.

What Madoff was thinking, we may never know; however it seems pretty obvious that eventually even this phony pot of gold would run dry. His investors, many of which would be considered super-affluent, should have seen this coming by using some basic precautions. So how do you safeguard yourself against this type of fraud?

Too Good to Be True

Have you ever been to a holiday party or family get together, when in the process of discussing investments someone shared with you “the investment of a lifetime”? It happens all the time, and is usually followed by something along the lines of “Oh, I have no idea what it is, but it got me a 20% return last year.” Buyer beware! Know where your money is going. If the name of the investment does not come up number one in a Google search, watch out. Your investments should be able to be checked in the newspaper and on the internet daily, if not instantaneously. Stocks, bonds, and mutual funds may sound boring, but it’s just the kind of boring Madoff’s clients wish they had.

Use an Independent Custodian

I have gotten a number of inquiries during the economic storm in regard to “Who has our money?” There is no lockbox in our office containing millions and we do not value any of the investments we offer. By using an independent custodian we eliminate a number of conflicts of interest. That third party is either Schwab Institutional or National Financial Services (Fidelity). These companies price the investments and provide statements to our clients. We have no input on the pricing or statements and that is the way it should be.

Understand Account Insurance

We all generally use life insurance, disability insurance, homeowners insurance, and even travel insurance. In fact the law requires that we have auto insurance. Why not investment insurance? I am not talking about guaranteeing the value of your investments, not that it wouldn’t be nice. I am referring to fraud insurance that most investors have free of charge to protect their accounts from just the type of activities Madoff was engaging in. The Securities Investor Protection Corporation (SIPC) insures each of our client accounts against fraud for up to $500,000 per account. If your account is greater than this, Schwab Institutional provides an additional $150 million per account through Lloyds of London.

This insurance will not protect your account from market declines, but it will make you whole again should your account be subject to securities theft or fraudulent transactions. We are proud that clients can select us based on our merit and expertise and not be troubled by unnecessary worry.

Since we were children we have been warned to watch out when something seems like too good of a deal to pass up. Sometimes it takes years to find out, and like Madoff’s clients, the consequences can be dearly. Whether large or small, take pride in the wealth and prosperity you have accumulated, invest wisely, and ask questions. Your heirs will thank you in the future and your psyche will thank you tonight.

Here’s to you and yours this holiday season!
Andy Pulsfort, IAR

Once again, we are called to practice prudent, practical cash management and to invest within the context of our own personal Prosperity Plan.™

Click here to read the New York Times on Madoff

May your investments always support your personal dreams and goals,
May prosperity be yours,
Mackey McNeill, CPA/PFS IAR
President and CEO
Mackey Advisors
www.CultivatingProsperity.com
859-331-7755
Mackey@CultivatingProsperity.com