The following is a snippet from an article in Forbes:
There are cheap and easy ways to vet prospective financial pros before you discover they're trouble the hard way.
Now that Bernard L. Madoff has been sentenced to 150 years for fraud, it's time to heed some lessons: How can you check out the people helping to manage your life savings?
Sure, a lot of smart money with access to expensive private investigators got taken in by Madoff, who admitted his guilt. But he was also the relatively rare case of a conman with no previous adverse public regulatory baggage. As it turns out, there are surprisingly efficient and economic ways to vet financial professionals and the outfits that employ them, for a history of blunders--or worse.
Is this really an answer? Of course due diligence, full disclosure and clear transparency is a necessary step, yet this is akin to just say no to drugs. Bernie Madoff passed every level of scrutiny discussed in this article, not only did he pass scrutiny but as the former head of NASDAQ I would say he stamped his credibility with his connections. The first reality is no amount of government regulation can protect a person from themselves, let’s look at some real answers on how to protect yourself:
This week we continue our search into the psyche of the investor. On the heels of Bernie Madoff and several other fraudsters what lessons are being learned? Once again as has always been the focus we are looking at the scam and the perpetrators and their behaviors as predators. I submit that this is backwards and actually is the core reason that ponzi schemes and all other financial scams continue. Understanding the behaviors of the scam predators doesn’t really help anyone get to the real issue.
What is the real issue? It is the behavior of the victims. The history of fraud is rich with stories of countless victims. This has existed for centuries and I dare say it is not going to stop until people insulate and inoculate themselves from becoming victims. The only way to do this is to fully understand the behaviors that allow you to become a victim. Of course this is a painful exercise in self-reflection, yet if there is to be any reduction in scams, schemes and fraudulent strategies it MUST start with the victims
There can be no fraud without victims. For centuries the behaviors and identification of how fraud and cons are developed has been available to the consuming public. With all this knowledge has any of the losses from fraud been reduced? That answer would be a resounding NO! In fact as the knowledge of how these cons are set up is more available, the amount of loss has actually grown exponentially. This alone should be evidence of the wrong focus.
As Bernie Madoff goes off to prison what benefit do the victims receive in financial gain? As the money is lost, and the guilt and psychic pain lingers with victims, exactly what comes next?
Last week we started with a very basic fundamental in the psychology of investing. This fundamental is the process of suitability. Of the many principles surrounding suitability we looked at RISK. Today we look at the motivators behind risk and hopefully this will help you gain some perspective of how to protect your money by gaining a fuller perspective of your behaviors around money.
There are two types of motivators, and they are towards pleasure and away from pain. We all are subject to both of these motivators. We only want to focus on the motivation as it pertains to making decisions with money. The element of risk is embedded in either a fear of loss or a sense of pleasure in gain. Both of these can be negative or positive. It simply depends on your value system and how you have programmed your behavior.
The fear of loss is most common and it is this button that con men push most often. This fear of loss comes with the urgency to get involved before the gains are missed. Of course you cannot really experience a loss as your money is still in your pocket. The real loss would only be incurred if you have less than you started with (this type of fear works against you after experiencing true loss as well as now you are seeking to recover your loss, this means you double up and display other fear of loss behaviors in order to re-gain the loss). There is no true loss as you still have your money, of course there can be no GAIN if you don’t take a risk and get involved. That is a gain, yet most of us perceive this future gain as a potential loss. Once the fear of loss button is pushed you have to move away from loss and in this case that requires that you give your money to the con, because not to do so would incur a loss in your mind. You have negatively motivated yourself to take on risk.
If you perceive the circumstance properly you would recognize the potential of gain and while moving towards the gain you would experience the proper fear of loss which would be fear of losing your existing money. In this mindset you would take the proper steps to look into the core issues involved in risk. This would include due diligence, full disclosure and clear transparency. Because your fear of loss button has not been pushed and your pleasure of gain button has you would behave responsibly and attach your sense of urgency to common sense. This is only one minor change in perspective, yet it would help insulate you from being victimized.
We will be producing a FREE 3 part email course on the Psychology of Investing, if you are interested please click link to register www.advocacy.bz
Your best weapon is having a non-biased third party advocate that can help walk you through the full suitability process and always be available to help you identify the non conscious motivators you are experiencing in your decision making process. In the end it is simply about making smart decisions about money.