Tuesday, July 15, 2014

A New Ponzi Scheme Every Week

I interrupt this blog stream for a public service announcement. One of the biggest risks to your retirement finances is fraud. Some call it “elder fraud”, but the fact is that Bernie Madoff destroyed the futures of a lot of people who were by no means elderly.

I was reminded of this topic by a New York Times column this morning written by Elizabeth Olson and entitled, "Despite Exposure of Madoff Fraud, New Ponzi Schemes Emerge" that noted that a new Ponzi scheme is uncovered nearly every week.

Ponzi schemes aren’t new. Charles Ponzi created his in the 1920’s, but Charles Dickens wrote about such a scheme in his novel, Martin Chuzzlewit, in 1844.

In, How to Smell a Rat, Ken Fisher does an excellent job of describing how to protect yourself (and your retirement) from fraud. I recommend the book. It’s a quick read that could save your savings.

I think the two most important points in Ken’s book are to expect reasonable returns on your investments and not to give your money away.

A gentleman called me not long ago to discuss retirement planning. He argued that he was currently investing in a financial product with a “safe” return of 9%. I could not convince him that the investment was risky. His arguments sounded like they came straight from a very good salesman.

I knew nothing about the investment, so why did I find it so suspicious? Safe investments today return about a percent or so. Any investment that needs to pay you 9% is not safe. Thinking you can earn a high rate of return with little risk gets you into trouble every time.

But, do people really freely give their money away to fraudsters? All the time.

Fisher recommends you never give your money to your financial planner. You can trust your money to a safe third-party like Smith Barney, Fidelity, Schwab or Vanguard and enter into an agreement whereby your financial adviser can trade in your account but cannot withdraw your money.

I used Ken Fisher's company to manage my portfolio for a while. They never asked for custody of my funds. Instead, they offered two companies for me to choose from and we went with Smith Barney. I opened a brokerage account at SB, deposited my funds there and entered into a contract for Ken to provide investment instructions to my broker. Ken instructed SB on what to buy and sell within my account but his company never had control of my money.

A scam artist can send you investment reports that look real while stealing your money. A trusted third-party will send you reports that you can trust and will be responsible for your money.

You have to be very careful with this one. Madoff clients thought they were leaving their money with a trusted third-party, but it turned out that Madoff controlled that company, too.

I said two key points, but here’s a third. Never let an investment salesman convince you that you’re getting in on an investment opportunity that most people don’t have access to. The suggestion that you are somehow being admitted to an exclusive club is a red flag.

You can go a long way toward protecting your life savings with those three rules. Never believe that you can make lots of money while taking little risk. Never give custody of your funds to anyone except a trusted, well-known financial firm. And don’t let anyone convince you that you’re getting in on something special and exclusive.

If you have any doubts, don't invest until you're confident. 

You worked hard for your money. Don’t give it away.


  1. I like this. One thing that I think is not considered enough in retirement personal finance discussions is our declining mental ability as we age. That is a major fear of mine and will make me tilt towards buying an annuity in early retirement even if it is worse from a "dollars and cents" perspective. I think that would protect me against my own bad judgment with my nest egg in later retirement.

    1. I think you make an important and valid point.