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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Pyramid schemes, Madoff victims, Scams, Schemes, and Swindles

How do you avoid getting scammed? Investments can seem legit, but it’s a house made of cards. We discuss the tell-tale signs of Pyramid schemes and Ponzi schemes and other scams. Avoid getting ripped off by the unscrupulous Bernie Madoffs of the world. It’s not that difficult to identify, yet we can get sucked in. How do we know an investment idea seems too good to be true? Can you afford to pass it up?


Bridget: Ponzi schemes, pyramid schemes, investment scams, how to avoid getting ripped off. Bernie Madoff has passed away. It's a great time to talk about it again. Hi. I'm Bridget Sullivan Mermel. And I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And that is a great topic for today, right Bridget? Bernie’s gone. Now it's in the news. But the scams and those schemes and those things are still out there for people. And, you know, how to avoid that, right. It was really scary back then thinking “golly, something that seems legit” and you find out it's all built…a house made out of cards. I know you've done a lot of homework. You did a lot of research back when this came out years ago on that. What do you have to say to people and sort of maybe refresh our memories on what happened, and then we'll talk about how we can avoid it.

Bridget: Okay, great. Yeah, so Madoff, first of all, he had a lot of credibility. The guy had been the chairman of Nasdaq, which is a stock exchange, and he had years of experience in the field. So, he could have made money legitimately, I believe. But somehow he got involved in this life of crime. And so, what he did is tell people that he had these great investments that would earn 10% to 12% a year and never lose money. Okay. So that's our first clue alright. Now, 10-12%, is…that doesn't sound that high. So that's an interesting part of his scheme is that a lot of scammers go with make money fast. Okay. 10 to 12%...that's not that fast.

John: Right.

Bridget: But it is better than you're going to ever get anywhere else. And so…

John: No downside, right? nothing to lose never going down.

Bridget: Right. And so it's really appealing to people's loss version, which is the technical term for it, which means they don't like losing money. So, people don't like losing money. And he appealed to that. So that was the first thing he did. The second thing he did was he took custody of people's assets. So that's a jargony term. That just means that he set up a company and all…he had everybody sign over all their assets to Bernie Madoff. And what we, as financial planners, do, is use custodians like Schwab or Fidelity and some of the smaller ones that like SSG or Pershing. And we have a custodian hold the assets. When people sign up with a firm, they don't sign it all up, send all the money to my firm. They send all the money to Schwab. So that was the second thing he did. That way, he could manipulate their statements. So, if the investments were going down, he could say they weren't. And he could show on these statements that people were making money, even if there was nothing behind it. So the lesson there is to have an outside custodian and check your statements.

John: Yeah. So literally fraudulent fake numbers on the return.

Bridget: Right. Exactly.

John: That's interesting. It's one of the things that I think about when I talk to folks about this. Remembering back that 10 to 12 years ago, when this all broke was exactly what you just said is if it's too good to be true, it probably is, right? Super high returns, consistent returns, but it never goes down. I mean, you have to take some risk with these things, right? If it sounds too good to be true, there's a red flag being able to explain it. What's going on? How is this thing working? Right. Where you don't need to remember this long term, you don't need to know, but after it has been explained. Could you explain it to your spouse or to a friend? Here's what they're doing with our money. So those sort of things, and then the one big one that I think is the last one you hit on, which is having the custodian, that fancy fans word. But where are you getting your statements? Right. Your firm, my firm. You don't get your statements from my place of business. You get it from Schwab, or you get it from Fidelity, or some third party. If I'm the one that's producing the statement, same giving the advice, you can cook the books in there. And so you eliminate so much of that by going with one of the third party, a major firm like that. I think the other thing that I talk about with folks is diversification. I heard back when this happened, it’s “Jeez I’ve lost all my money.” And my thinking like, well why would you put all your money, even if it’s a good investment, in one basket, right?

Bridget: Right, absolutely, absolutely. And you know, to reiterate your other points about the…explaining it to somebody else. When I was doing the research, there was an expert who had invested in Madoff. And he felt really bad because he had explained that he was investing in Madoff to one of his friends. And his friend said “sounds like a scam, I'm not investing.” So, I thought that was very telling, obviously. And then to your point about diversifying, if you're losing everything because of this one investment, well, that's not diversification. That means you have all your investments in one thing, that's not prudent. Generally, I'm okay with having one custodian. Again, one place that you invest, but different investments among in that place is normal.

John: That's right. That's right. And I go back to the risk and return, right. If you're going to get more return, it's possible. But it means there has to be more volatility with things.

Bridget: Right.

John: There’s no such thing as a safe, high-return investment. We don't love that, right, when you find that, let me know. But it's just that's just not how reality is. It's okay to take higher risk. But then if it sounds too good to be true, right, you know use your gut, the smell test. The point is if it feels wrong, don't take that action. And what this reminds me of something that Warren Buffett once said is that “there's no called strike in investing”, meaning you can be up in bat in a baseball game and during a game, right? If a ball comes across the place, they're going to call a strike. You have to swing. When you're talking about your investment, even if it's a good deal, right? You can let it go right down middle of plate. But when you swing, you have to make sure that you're getting, making contact. It's not like every good idea you've got to act on.

Bridget: Right, good point.

John: You get the good ideas, and you don't need to hit home runs. You hit a bunch of singles. You still score runs and win. That sort of a thought process is, you know, don't swing for the fences on every pitch, right?

Bridget: Absolutely. And in a baseball game, even if you win, you have had what is it? Three times nine, or 27 outs, so you’ve goofed up 27 times, even if you win the game. So anyway…

John: One of the things I'm just…the big takeaways I see it is on the things we talked about. Diversify, don't invest in something too good to be true. And then to me, that really big one is where is your money actually held? Where are you getting the statements? Does it say Schwab or Fidelity or Vanguard or some company? Or is it, if it's not the firm like Trinity or Sullivan Mermel, then you know, you've got somebody else looking at that, and that’ll eliminate, that one thing right there, eliminates the vast majority where you don't have to worry about this if you're not putting everything in one basket. So that'd be my one big take away from this.

Bridget: Great. So with that, we'll wrap up. We want to mention two things at the end of this show. One is that we're both members of ACP or the Alliance of Comprehensive Planners. It's a group, a non for profit group of fee-only financial planners around the country. And we all share a lot of the same common values. And the other thing is to subscribe, please subscribe to our channel. It helps us get credibility with YouTube and helps us get our word out. So with that, let's wrap it up. Thanks, John.

John: Alright, thanks Bridget.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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