4 Ways to Avoid Being 'Madoffed'

Simple safeguards in an insecure financial world.

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Bernie Madoff swindled more than $20 billion from investors over two decades. The two-year anniversary of his arrest should remind every investor that they need to protect themselves from unscrupulous "financial salesmen."

Madoff surely had the trust of his clients; most recommended him to their friends. He gave every investor exactly what they wanted: great, consistent, and what most considered risk-free returns. But as the world soon found out, those returns were only on paper—literally.

So how do you protect yourself from crooked brokers? There are four ways to stay safe:

First, since an advisor will potentially be working with an investor's life savings, it makes sense to perform a background check. Tools exist today to make this process easier than one would expect. Visiting the websites of the Securities & Exchange Commission and Finra is a good start. Both offer the ability to perform a broker check and provide a means to see if there are any infractions on the advisor's record. Bernie Madoff had several that showed up on his profile. While this may not have convinced an investor to avoid using Madoff's services, it could have given them reason to invest less, or use him on a trial basis.

[See Teach Your Kid a Lesson in Investing.]

Second, look at an advisor's designations. Obtaining a certification or designation is a difficult task that's usually not undertaken by an imposter. Many require months or even years of study followed by an inclusive exam testing not only basic knowledge of a subject, but also the application of it in the field.

Many designations exist, but the most reputable are the Certified Public Accountant, the Certified Financial Planner, the Certified Financial Analyst, and the Accredited Investment Fiduciary. All four have continuing education requirements as well as an ethics provision. The attainment of these titles shows an advisor's commitment to excellence in their industry.

Third, and probably the most important step, deals with the custody of assets. All investments must be housed somewhere. The firm that has custody of an investor's assets also provides access to the markets and the ability to trade securities. The custodian also prints the monthly statements. The rule here is to always have the custodian be separate from the advisor. Simply put, the advisor should not hold the money.

In Madoff's case, he was telling his clients what he planned to do with the assets, performing trades with his own accounts, and then reporting the actions on statements that he wrote. Given that ability, it becomes easier to understand how he bilked investors out of billions of dollars.

Finally, investors must use common sense. As the saying goes, it if seems too good to be true, it probably is. Anyone promising yearly percent returns in the teens and twenties consistently (when the market could not support them) is obviously a fraud. But as most investors struggle to make a competitive return, this is easier said than done.

Kelly Campbell, Certified Financial Planner and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Fairfax, Va. Campbell is also the author of Fire Your Broker , a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.