Logic dictates that financially literate people should be less susceptible to any type of investment fraud.
But let's recall that more than 2,200 people, most of whom were considered "smart" men and women, were defrauded out of more than $60 billion by former stockbroker and admitted fraudster Bernie Madoff.
To that point, Madoff's firm, which collapsed in 2008, duped pension funds, foundations, a philanthropy established by the Holocaust survivor Elie Wiesel and wealthy individuals, such as actors Kevin Bacon and Kyra Sedgwick.
No one really knows just how much money is stolen from Americans each year. More than $100 billion is a safe starting point, but it is suggested that this figure is far too conservative. People who are victims tend to underreport — or simply not report at all. It's embarrassing, especially for someone who should "know better."
There are numerous ways in which we are tempted to participate in offers that are too good to be true. The top six scams in America, according to AARP, involve romance; charities; home repair; health care; the "grandparents scam," which scares grandparents into thinking their grandchildren are at risk and, of course, investments.
Newer scams include fake calls from the Internal Revenue Service and fake offers to serve as Walmart mystery shoppers. (All you need to do is provide your checking account number so they can "mail you compensation.") These and so many other scams continue to exist because enough people fall prey each and every day.
Perhaps it's because smart people falsely think that they can't be fooled.
Simon Lovell, an English comedy magician, card sharp actor and con man, is famous for stating, "I love it when people tell me they can't be conned, because in my mind they are already halfway to being conned."
Smart people — indeed, all people — need to do three things in order to minimize the probability of being scammed.
First, look at yourself in the mirror and tell yourself, "I can be scammed." You may be a pretty bright person, but it's not your smarts that make most of your decisions.
Second, we are all emotion-centric. Try to avoid making decisions based on emotion. Why are sales of lottery tickets through the roof when the payoff is astronomical? Even though the chance of winning is greatly diminished, people can't overlook the chance of great wealth.
Likewise, when the stock market is at record highs, there is a rush to participate, thus swelling valuations until another emotion, fear, kicks in and then we sell.
And third, get informed. The more information we can acquire, the better prepared we are to combat scammers like Madoff.
Former securities industry executive Harry Markopolos had discovered evidence over nine years suggesting that Madoff's business actually was a massive Ponzi scheme. Had Madoff's victims — or the Securities and Exchange Commission, which Markopolos alerted — asked the same questions, they never would have invested with him in the first place.
While most people will never be as well versed in financial matters as Markopolos, now a forensic accounting and financial fraud expert, it makes sense to obtain at least a cursory understanding of how your investments benefit you and your family.
Too many people abdicate their responsibilities because finances can be confusing. So we choose to trust our advisor. And we should trust the competent, caring and honest person who understands our needs and takes the time to truly know us. Fortunately, these people are in the majority. Regulators and most companies spend countless millions of dollars making certain their advisors do the right thing.
Yet there are individuals in the financial services industry who lack competence and honesty, and it's very difficult to determine who's who. According to recent data compiled by the Certified Planner Board of Standard's Financial Exploitation Study, 19 percent of advisors commit fraud with intent or lying.
Here are several additional steps you can take to certify that your financial advisor is both honest and competent:
First, conduct a due-diligence exam on your current or prospective advisor. It begins with a visit to www.brokercheck.com. This is the Financial Regulatory Authority's website, available to all who want to see if an advisor has any disclosures or infractions. If the advisor has even one disclosure, inquire about it. It may be the result of a disgruntled client complaining about a bad stock pick, but ask anyway. If there are two or more disclosures, you may want to move on to another advisor.
Next, there may be excessive activity in a commissioned-based account costing you more money. Whose agenda is the advisor paying attention to — yours or his?
How often does your advisor communicate with you? Are you forgotten or just too small an account? Inexcusable. Find someone who cares about your money more than you do. If the same solution — e.g., an annuity, a single stock, a private placement, etc. — shows up as an answer for every financial problem, the advisor may be pushing product and not solving problems.
The reality is that we are all busy with living our lives and we should be able to trust our financial advisor. Just make sure you've placed your trust in the right advisor.
— By William M. Francavilla, certified financial planner and author of "The Madoffs Among Us: Combat the Scammers, Con Artists, and Thieves Who Are Plotting to Steal Your Money"