What do Larry King, Sandy Koufax, Jeffrey Katzenberg, banking giants HSBC and Banco Santader, and institutions of higher learning like Yeshiva University, all have in common? They were each victims of the biggest financial scammer of our lifetime, financial advisor Bernie Madoff. While we'd all like to believe our money is safe in the hands of our chosen trusted financial advisor, Bernie Madoff's scheme highlights that we can easily fall prey to a scammer. Could you have been the next Bernie Madoff victim? The answer is YES. And that means it's time to learn how to weed out the good financial advisors from the bad. To help you avoid falling prey to any trusted advisor, follow the five steps in this article. After hearing countless stories in which Madoff's victims shared how they'd lost their life savings, you may have thought yourself lucky. After all, some of the smartest individuals and institutions in Wall Street handed over their savings to Madoff, but not you. Victim or not, all of us have valuable lessons to learn from Madoff's fraud. Consider the following fact: "Since Madoff's arrest, securities regulators have charged a half-dozen other financial advisors in similar, though much smaller, schemes, including Florida hedge fund manager Arthur Nadel, who allegedly took off with $300 million." Moral of the Madoff Scandal: Check out Financial Advisors (Kathy M. Kristof; LA Times, Jan 25, 2009). So, what can ordinary everyday people do to protect themselves against the next Bernie Madoff? #1: Invest Passively Many people think that what they are looking for in a financial advisor is someone (like Madoff) who will get them in on the next big deal. That's not investing, it's gambling. You don't want a financial advisor who will be picking stocks for you or frequently buying and selling your assets attempting to time the market. Research shows this is a recipe for disaster, even if your financial advisor is totally on the up and up. Instead, find an advisor who is going to manage your assets by guiding you to choose a low cost, tax efficient index mutual fund invested across a broad class of assets. That way, your advisor can spend more time advising you instead of churning your account hoping to pick a winner. #2: Diversify Diversification does not mean spreading your assets around among financial institutions or even financial advisors, it means having your assets invested among various industries and asset classes. For example, with the right indexed mutual fund, you could have your assets invested in three broad asset classes; U.S. stocks, foreign stocks, and bonds. And within those asset classes, you may be holding some small cap stocks, some mid-cap and some large cap. In that case, you don't care about the performance of any one stock at all because your risk is managed across many classes and categories and the return on any one investment does not affect the overall portfolio much. The key to these type of index funds is to ensure they are properly tax managed for your personal situation. And always compare your index fund against a benchmark such as the S&P500 and if your chosen fund is not comparing favorably, ask your financial advisor to account for why. The right financial advisor will help you choose the right fund and then counsel you to stick with it even through the ups and downs of the market, but be wary if your chosen fund is not regularly performing better than the S&P. #3 Require Regular Statements It sounds unbelievable, but the Bernie Madoff investors oftentimes didn't even require him to provide statements and when they did see statements, the statements had been prepared by his company. Always ensure that your statements are prepared by a well known custodian, such as Fidelity Investments or Charles Schwab Corp. Even as an independent advisor, your financial advisor will use one of these custodians to handle your trades and maintain your assets. Be extremely wary of any investment advisor who does not use some well known, credible third party custodian. #4 Have a Fiduciary Relationship With Your Advisor Some financial advisors are in a fiduciary role relative to their clients (like lawyers and CPAs are) and others are not. What's the difference? A fiduciary has a legal requirement to put your interests before their interests. Stock brokers, financial advisors, CFPs, and insurance agents all have the legal right to put their interests before yours. And they often do when selling you commission based products that put more money in their product, but may not be the right investment for you. Look for a Registered Investment Advisor (RIA). This is the only type of financial advisor who cannot put his or her interests first by law. #5 Rely on a Full Professional Team to Advise You If you really want to know you are secure and are getting the best possible advice, be sure to have the holy fiduciary trifecta of a CPA, Lawyer, and RIA working on your behalf. By working together, this trio can come up with the best possible guidance for you when it comes to investing your assets in a tax favored manner and holding those assets in such a way as to minimize your potential liability and make life as easy as possible for your loved ones at the end of your life. Find a team that has experience working collaboratively and is willing to work together on your behalf instead of putting you in the middle and ping ponging you back and forth among the advisors trying to figure out the right answers. ** The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your unique needs, and where appropriate, seek professional advice from a qualified financial advisor. ©Surprenant & Beneski, P.C. 35 Arnold Street, New Bedford, MA 02740, 336 South Street, Hyannis MA 02601 and 45 Bristol Drive, Easton, MA 02375. This article is for illustration purposes only. This handout does not constitute legal advice. There is no attorney/client relationship created with Surprenant & Beneski, P.C. by this article. DO NOT make decisions based upon information in this handout. Every family is unique and legal advice can only be given after an individual consultation with an elder law attorney. Any decisions made without proper legal advice may cause significant legal and financial problems.