So, I was looking for info on Ponzi schemes the other day an found a blog written by an ex-Ponzi schemer by the name of Chuck Gallagher. After doing time for defrauding his CPA clients, he is now a motivational speaker and business ethics speaker. His blog had a particularly interesting post on how people get defrauded by Ponzi schemes. He says there are three aspects to being defrauded, which he calls the P.I.T.
- Promise – The scammer makes a promise of wonderful returns using their superior knowledge or system.
- Illusion – The scammer then creates and illusion of success in the scheme, perhaps with forged documentation.
- Trust – The scammer exploits trust between him- or herself and the victim.
In his post, Chuck brings up a good point: “if you were that good at investing you wouldn’t need someone like Madoff.” If clients were so adept at investing, they wouldn’t need an investment adviser, now would they? That is, I think, one of the most dangerous aspects of choosing an investment adviser to trust with your money: ignorance about investments.
The best defense I can think of is to become educated about investments. Do you know what the investment is? Do you know what kind of risk you’re taking on? Do you understand possible returns? Do you understand how liquid your investment will be, i.e. how quickly can you get your money out? Do you understand the costs? Do you have a sense of what comparable investments are doing?
Remember, if it’s too good to be true, it probably isn’t true.