KEY POINTS:
It appears thousands of "sophisticated" individuals and institutions lost money over several decades in the US$50 billion ($98 billion) Ponzi scheme allegedly perpetrated by Bernard Madoff, a New York City stockbroker and former head of the NASDAQ stock exchange.
People are asking: where were the US Securities and Exchange Commission and other regulators all this time?
And could the same thing have happened or be happening in New Zealand?
Is regulatory oversight enough? Investors may well be looking at their advisers, thinking: "I trust you, but what if I'm wrong? I don't want to be a victim years from now."
However, there are several safeguards that would have prevented the Madoff situation from happening.
Know what you own
Stick to stocks, bonds and managed funds that are publicly traded and listed on major exchanges like the New Zealand Exchange, Australian Securities Exchange, and the London and New York stock exchanges.
They are valued independently at least daily while the exchanges are open. You can check their reported returns against your own portfolio.
If you can't look up prices and performance in the newspaper or on the internet, that's a red flag. Ask a lot more questions.
Use an independent custodian
Madoff held his clients' assets, managed them and priced them too, in a classic conflict-of-interest scenario.
Investment performance can look better if the prices reported to clients are manipulated, which is allegedly how Madoff showed winning year after winning year, despite market turmoil.
Wealth management advisers with independent, third-party custodians have no input on investment pricing. And their clients usually receive investment statements directly from those custodians.
Clients are protected from having their funds stolen by their adviser because the independent custodian holds their investments.
The only power an adviser has over their accounts is to make trades in the account; receive copies of monthly statements, tax documents and trade confirmations and to deduct fees.
Check on insurance
Check that your adviser has fraud insurance. It does not protect against market declines, but does protect against theft of securities and/or related fraudulent transactions.
Check on CEFEX certification
The Centre for Fiduciary Excellence (CEFEX) is an independent investment standards organisation based in Toronto, Canada, which certifies companies for conforming to the highest fiduciary practice standards in the world.
To achieve CEFEX certification, an advisory firm must demonstrate adherence to fiduciary precepts, under the scrutiny of specialist fiduciary auditors.
Every aspect of the investment advisory and management process is examined to ensure approved processes are established and maintained.
Apart from showing appropriate documentation, a company is visited by a fiduciary assessor on an annual basis, much like accounting auditors, to ensure that correct processes are being followed.
Had Madoff's firm sought this outside "seal of approval" they would not have made it past the first question in the audit. When investing over the long term it is essential that advisers and investment managers meet the highest fiduciary standards.
Finally, if an investment sounds too good to be true, it probably is.
Reportedly, Madoff claimed consistent annual returns of 10-12 per cent with little volatility and no annual losses. It's unlikely any legitimate fund manager can make that claim.
The collapses of New Zealand finance companies, such as the high fliers MFS, Westpoint and Opes Prime in Australia, and Bernard Madoff in New York, show that investors must take greater responsibility for doing their own due diligence.
