Key Messages
How To Protect Your Investments And Spot Dangerous Ponzi Schemes
Financial con artists and fraudsters are incredibly difficult to spot.
They often use clever smear tactics and psychological tricks to win people’s trust, only for victims to later realize that their hard-earned money has disappeared in an instant.
The aim of How to Smell a Rat is to help you be one step ahead of these fraudsters by arming you with the knowledge on how to protect your investments and spot these kinds of criminal activities.
It teaches readers the telltale signs of a con, why successful fraudsters like Bernie Madoff and Allen Stanford use anti-fraud lobbyists, as well as how the U.S.
Securities and Exchange Commission can’t save you from being taken advantage of.
By reading How to Smell a Rat, you’ll be able to learn valuable lessons in spotting potential financial con artists and protect yourself against becoming their next victim.
Avoid Investment Fraud And Misappropriation Of Funds Through Having A Custodian
If you’re investing your money, you have to be careful who you entrust it with.
In the case of Bernard Madoff, many people put their money in his hands and were swindled out of a whopping $65 billion.
The key to avoiding a similar fate is to make sure that your financial adviser doesn’t have custody of your assets.
The best way to do this is to employ a custodian – a trusted financial institution that can safeguard your securities (physically or electronically).
Custodians are an important buffer between you and the investment adviser, as they have no control over your accounts or profiting from your investments.
They’ll also make sure that none of your funds disappear and verify that each transaction is authorized by you.
Plus, you’ll always be able to track changes in your accounts via the custodian’s account statements and online access 24/7.
This will give you peace of mind knowing that someone else other than your financial advisor is keeping tabs on your transactions.
The bottom line: don’t let anyone else other than a custodian have control of investing and safeguarding with respect to where and how you park your money for maximum results
Be Cautious Of Money Managers Who Promise Great Returns–Consistency Is Rare And Extreme Returns Are The Norm
When meeting with an investment adviser, you should always be wary when they promise great returns.
It’s important to remember that no one can guarantee income of 30 or 40 percent year after year.
This type of extreme performance only occurs when master con artists like Charles Ponzi and Nicholas Cosmo are involved.
While it is possible for an adviser to outperform the market in a given year or two, there’s no secret formula to long-term success as returns tend to fluctuate greatly from year-to-year, according to Global Financial Data.
In fact, 2/3 of annual S&P 500 returns since 1926 were either below zero or above 20%.
This means that even the best investors have their bad years– Warren Buffet was wrong around 30% of the time!
Therefore if someone claims they have an impressive track record with consistent above-average results, this could be a warning sign that something is amiss– so watch out!
Don’t Fall Prey To Unclear Investment Strategies: Understand What You’re Investing In Before You Dive In
When it comes to investing, it’s key to understand strategies in order to make the best decisions.
However, those that offer investments can often use financial jargon and investor-speak that makes it difficult to comprehend.
Many times even they don’t actually know what they are talking about.
That’s why if you’re looking for an adviser, it’s important to make sure he or she can explain complex investment strategies in plain English so you can be sure you actually know what you’re getting into.
If your advisor starts using big words meant to impress, but doesn’t really explain things well, this is a red flag.
It’s also important not to fall for flashy tactics marketed as a full strategy without actual proof of how much money will be made from them.
It’s just not enough information!
Tactics are only the tools that build up the plan; without a blueprint (strategy), all those tools won’t do any good.
In conclusion, always look for an adviser who provides straightforward explanations of their investment plans and real evidence of their success so you can make informed healthy decisions when it comes down to your investments.
Don’T Let A Display Of Flash And Exclusivity Distract You From The Quality Of Your Financial Adviser
When it comes to choosing a financial adviser, it’s important to be wary of flashy displays or claims of exclusivity.
While this may seem like an attractive way to join an “elite social club,” these tactics could be covering up someone who simply isn’t as reputable as they appear.
Not only that, but any extravagant expenditures made by the financial adviser in the form of marble furnishings and expensive toys are ultimately the client’s expense – meaning that these expensive trimmings could indicate your adviser isn’t using your funds very efficiently.
Similarly, don’t assume exclusivity is automatically a good thing.
It may mean the adviser is more selective with their clients, or it could just be a trick to make things more desirable and difficult to obtain.
However at the end of the day, exclusivity doesn’t guarantee lower fees or improved performance – which makes it an unstable reason for choosing someone as your financial adviser.
Ultimately it’s important to remember that a top financial expert won’t have time for expensive toys – meaning if you see them outfitted with extravagances, consider whether or not you trust them enough to put all your money into their hands.
No Financial Adviser Is Truly Free: Be Careful Who You Trust With Your Money
Charity donations or a good reputation are not reliable indicators of an adviser’s trustworthiness.
Even if your financial manager isn’t a fraud like Bernie Madoff, he can still be tempted to carry out trades solely to earn transaction costs – even when it’s not in the investor’s best interests.
Plus, it is possible for people to buy a good reputation, or do charitable works to appear generous and dedicated to public welfare.
Madoff himself donated more than $1 million to Lymphoma Research Foundation in 2007 and Allen Stanford hired lobbyists to support the Financial Services Antifraud Network Act in 2002 – these things may have increased their reputability but they still defrauded their clients.
So sadly, reputations and charity donations don’t peg an adviser as trustworthy – that’s something you really have to work on verifying other ways!
Don’t Choose A Financial Adviser Based On Referrals From Friends: It Could Cost You Dearly
When it comes to choosing a financial adviser, a referral from your friend is not enough.
You need to do your due diligence and make sure that the person you’re entrusting with your money is capable and trustworthy—and it’s very possible that even your friend hasn’t done their research to know if their own adviser is any good.
Con artists are aware of this tendency in people to trust referrals, which could be why Bernie Madoff had “unofficial” agents who referred him to their friends.
Additionally, being in the same peer group or belonging to the same religion, club or alumni association isn’t always an indication that someone will be a reliable financial adviser.
It’s easy for fraudsters to take advantage of people’s default trust towards social groups, as Bernie Madoff marketed heavily directly to his Jewish community despite causing them ruin later on.
In the end, make sure that you do proper research before trusting any financial adviser, even if they did come recommended by a friend.
The Sec Does Its Best To Keep Investors Safe From Fraud, But Diligence Is Key
The SEC does its best to keep investors safe from fraud, and they do succeed with certain standards of transparency, inspections, and enforcement.
But when it comes down to it, individuals must also protect themselves by doing their due diligence and researching any company or individual who will serve as a financial advisor.
It’s simply impossible for the SEC to have the capacity to monitor every single registered firm at all times, meaning it’s essential for individual investors to take extra precautions in order to ensure their money stays safe.
The U.S.
Securities and Exchange Commission provides important protections and regulations on investments, but in the end it remains up to the investor themselves to make sure that their money is going into a trust-worthy entity — not just relying on the promises made through paperwork alone.
In situations where a person registers his firm and doesn’t list himself as someone who directs investments or discloses suspicious information about his past, never assume that you can rely solely upon what the paperwork states; rather rely on thorough research of your own before signing anything.
While regulations and laws set by the SEC are indeed invaluable in protecting our investments, ultimately, there’s no substitute for proper research of any company that is invested with anyone’s money.
It’s up to you – The SEC can help but users need to bear primary responsibility for making sure their money is truly secure!
Wrap Up
The final message of How to Smell a Rat is clear: it pays to be informed.
Crooked financial advisers use various tactics to take advantage of their clients and make money off them.
However, if you know the signs to look for, you can save yourself the pain and frustration of hiring one.
This book helps readers detect when something isn’t right with a financial adviser.
It covers warning signs such as evasive answers, unrealistic returns on investments, pressuring people into making decisions quickly, and more.
By knowing these telltale signs of a rat, readers can protect themselves from being taken advantage of.
