A Ponzi Scheme Red Flag

Here's the most-repeated tip I heard while talking to sources for this story on How to Avoid a Ponzi Scheme:

Understand the difference between a manager and a custodian. A custodian, which would include the Fidelitys and Charles Schwabs of the world, is in possession of your investment account and issues periodic statements of transactions. The manager of assets (your financial adviser) executes those transactions. "A lot of people fail to understand why it's important to separate these functions," says Kochis. "Frauds almost always occur when those two things are put together." In other words, look out for an investment manager who wants complete control of your money and asks that checks be made out to him or her. You can sleep tight if your funds are in the custody of a broker-dealer firm regulated by the Financial Industry Regulatory Authority and backed by the Securities Investor Protection Corp. But make sure you receive at least quarterly statements, says Mickey Cargile, founder and managing partner WNB Private Client Services, which is based in Midland, Texas. "The key is that you get it directly from the custodian and not from the adviser."