Money Management

3 Financial Lessons to Learn from the Madoff Scandal

Just over seven years after Bernie Madoff’s Ponzi scheme — believed to be the world’s largest — collapsed, the fraudster is back in the headlines thanks to a new paperback edition of Brian Ross’ book and an accompanying mini-series (starring Richard Dreyfuss) that ABC is investing in for sweeps week. While many of us would like to think we’d never be as naive as to fall for such a scheme, the unfortunate reality is there is a chance. That’s why it’s important to remember the financial lessons we learned from the Madoff scandal.

#1: If It’s Too Good to Be True…

You’ve surely heard the expression before but what exactly were the warning signs that Madoff’s investments were too good to be true? For one his investors were allegedly seeing steady double-digit returns year after year. Even in down markets Madoff managed to still turn a healthy profit for his fund. Of course once the banking industry collapsed in 2008 even the “magic man” couldn’t pretend any longer, leading him to confess his scheme to his family.

The lesson here can be summed up in two words: due diligence. When Madoff was questioned by clients about his investing savvy, he’d refuse to go into details claiming that his method was proprietary. Ultimately if you’re asking questions that a fund manager isn’t comfortable answering, you shouldn’t feel comfortable investing with them.

#2: Diversify Your Investments

Another applicable cliche is “don’t put all of your eggs in one basket.” As Madoff was able to raise the wealth of his investors (on paper anyway) many began sinking even more money into their accounts. While it seemed like a sure bet at the time, you’d probably be hard-pressed to find one victim who doesn’t wish they’d spread out their investments.

This isn’t to say that you should assume that one of your investments is a scam but you should never invest what you aren’t able to lose. While no investment is a 100% safe some are obviously far riskier than others. As a result you should always manage your risk by maintaining a healthy mix of conservative and aggressive investments.

#3: Have Access to Your Account at All Times

If Madoff had started his Ponzi scheme today it may have been a bit harder for him to pull it off. By now many of us are used to checking our banking and other accounts online and being able to monitor the activity 24 hours a day. This can actually go a long way in preventing fraud.

In the case of Madoff he would send account updates on a periodic basis. This allowed him to simply make up whatever growth he decided that an account should see in order to retain the client. In today’s FinTech world it’s simply unacceptable to not have easy access to your account and it’s something you should demand.

Although it may feel like we’re far removed from the Bernie Madoff scandal the truth is that the lessons learned from that event are still relevant to today’s investors. By doing your due diligence, diversifying your investments, and monitoring your account (or at least being able to do so), you will help protect yourself and your investments from fraudulent behavior.

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