Written by Victor Guettlein, CFP® | 25 August 2011

In the post-Bernie Madoff world, more and more investment scams continue to come to light.  Many of those who have been ripped off lose most, if not all, of their life savings.  Unfortunately, legal proceedings rarely make the victims whole.  So, how does an investor  protect his or her life savings from unscrupulous advisers and Ponzi schemes?

Asking these five questions can help you avoid becoming a victim of fraud:

1. Does the offer sound too good to be true?   This is a common piece of advice, but it’s worth repeating.  If it sounds too good to be true, it probably is! Whether it’s a private investment opportunity, a hedge fund, or a pitch to buy an insurance policy that gives you market returns with no risk, you need to read the small print and understand the details.   There’s an old saying in economics: There is No Such Thing as a Free Lunch (TINSTAFL).
2. Does the adviser have a clean regulatory record?  Investors can easily check online to see whether the money manager they are considering doing business with has a criminal record or has had previous consumer complaints.  Free public databases are available at www.SEC.gov and www.FINRA.org.
3. Is the adviser a fiduciary?  A fiduciary adviser is legally bound to always act in your best interest in all aspects of the financial relationship.  Many brokers will not, or cannot, act in this capacity.  It is in your best interest to work with an acknowledged investment fiduciary such as a registered investment adviser or certified financial planner. Get it in writing!
4. Are performance claims verified by an independent third party?  Unscrupulous advisers may provide performance history to back up their sounds-to-good-to-be-true claims. If such claims are not validated by recognized, independent third-party sources, then you should seek additional verifiable information before accepting these performance claims.
5. Who has my money?  Be wary of any request to write a check for an investment to anyone but an independent third-party custodian.  An independent custodian is a fiduciary that allows a manager to act on your behalf, but not to withdraw your money for his own illicit purposes.

These simple questions can give investors a good start at filtering out fraudulent investments and Ponzi schemes from legitimate investment opportunities.