Protecting Your Investment Portfolio

When people fall victim to a scam and lose their investments, 20/20 hindsight often has the rest of us scratching our heads and wondering, "How the heck did they fall for that?"

We all have our circles, and when one person in that circle trusts someone, it becomes easier for the rest of us to trust that person. We assume that someone we know did the due diligence and now we don't have to.


Let's hope that after being inundated with news about Bernie Madoff's alleged $50 billion Ponzi scheme -- perhaps the scam of the our lifetimes -- we're a little less smug about who falls for a scam and who doesn't.

1. Keep your eyes wide open
Each person who hands money to an adviser or a firm to invest must do so with his eyes wide open. Check out the adviser's credentials, get references and use a search engine or news service to see if anything's been reported or blogged about the adviser. Make sure the adviser understands your goals and financial needs. And know how your money will be invested, and get it in writing.

But if your best efforts aren't enough and you learn that some or all of your money is gone either through fraud, bad advice, inappropriate investments or a bankrupt brokerage, you may find yourself relying on various agencies to recover your funds.

2. SIPC gives limited protection
Just as the Federal Deposit Insurance Corp., or FDIC, protects the money you have in deposit accounts in member banks and savings institutions, the Securities Investor Protection Corp., or SIPC, affords some protection for cash, stocks and bonds in your brokerage account. But it's a mistake for investors to think that SIPC coverage is as strong and broad as FDIC coverage.

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"SIPC is very tight with the dollar. They operate almost like a private-sector insurance company in terms of not wanting to pay claims," says Mark Maddox, a securities and investment fraud attorney with Maddox Hargett & Caruso in Indianapolis.

Maddox, a former Indiana securities commissioner, says that when you look into the SIPC, you'll see it's nothing like the FDIC.

The FDIC and SIPC both protect you when an institution fails. If the money you have in a deposit account -- checking, savings, CDs, money market account -- is within the FDIC coverage limits, you'll receive your money promptly, no questions asked.

3. Stingy with the payout
The SIPC protects cash, stocks and bonds up to $500,000 per customer at member brokerages. That includes a $100,000 limit on cash. Mutual funds are not covered by the SIPC.

"SIPC always has been a tough place to get money out of," Maddox says. They'll deny claims. They'll say you don't qualify for this reason or that reason. They'll put investors through a gauntlet, and only those people who have the time and energy and resources to survive the gauntlet will get any money out of SIPC.

"You're at the mercy of people who are making insurance-type decisions. You're often involved in litigation and then one or two levels of appeals. Very often you'll need to employ an attorney on a one-third contingency fee to help you through the process. Then at some point you're really just trying to cut your losses."

4. No protection against fraud
From its inception in 1970 through December 2007, the SIPC paid investors only $508 million from its reserve fund. SIPC coverage comes into play only when an institution fails and assets are missing from an investor's account. If a brokerage is in business and you believe assets are missing from your account due to fraud, the SIPC will not help you. You'll have to hope that the brokerage can determine what happened and reimburse your account, or perhaps you'll need to turn to the Securities and Exchange Commission.

Misleading SIPC Talk...Read More