The Madoff Affair: Behind the Scenes

...MainStreet: What do you think is the most important piece of information the average investor should take away from this story?

Smith: We were surprised all along at how so many people gave their money over to Madoff or to a feeder fund and then asked very few questions. Those that did were rebuffed by Madoff's staff, but they left their money in his hands. I think ordinary investors should make sure they understand the statements they're getting and the strategy used to generate profits. If it's a secret proprietary strategy, then an investor should be aware of the risk. A track record is nice but it is not hard to find managers who have succeeded for years only to falter badly. If 90% of professional money managers fail to beat the market over the long run, then it seems an investor should either park their money in an index fund or really know what risks they are taking. Ask questions. And make sure you understand the answers. Madoff's investors seemed only to focus on that bottom line.

What are some red flags investors should look out for?

A big red flag, which we didn't get to explore in the piece, was the fact that Madoff was his own custodian, broker and investment advisor with a tiny unknown accounting firm doing his audits. He was accountable to no one but himself. Any investor should steer clear of such a set-up. A third party should hold your assets, not the investment advisor. That alone should insure that someone other than your advisor is verifying the trading...

MainStreet: The Madoff Affair: Behind the Scenes