Financial fraudsters like Bernie Madoff are still out there and today’s Tech Ticker interview with Ken Fisher, CEO of Fisher Investments lays out the responsibility very clearly: it is up to YOU to due your own due diligence to sniff out fraud. Lucky for us Ken Fisher has just released a new book describing 5 easy steps to help investors detect fraud titled How to Smell a Rat.
Five questions to ask yourself before investing in any fund:
- Are custodial duties and decision-making kept under the same roof? Custodians handle the money while manager manage the money. Madoff had access to both which made it very easy for him to do with the funds as he wished. By having funds such as Fidelity or Schwab serve as custodians you can feel safe knowing your manager cant receive your money and run.
- Are the returns ALWAYS consistent and strong? Madoff never had a down month let alone a down year. If you see your manager reporting returns of 2% each month for several years straight than red flags should be raised.
- Is the strategy understandable? If it is too complicated to be explained then Fisher suggests to simply run in the other direction.
- Are there talks of exclusivity? Just because there are celebrities investing doesn’t mean the fund is golden. Furthermore donating to charities does not mean the fund manager is an automatic “good guy”. Madoff touted celebrity names and his lavish charitable gifts all the time to lure in new client money.
- Are they too busy to answer your questions? If the manager can’t give you the time of day because they are too busy then it may be a sign that they are hiding information from you.
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