How to Protect Yourself from the Next Bernie Madoff
Who Was Bernie Madoff?
Bernard "Bernie" Madoff was an American financier who at one time served as non-exclusive chairman of the NASDAQ stock market. In 1960, Madoff founded a penny stock brokerage which grew into Bernard L. Madoff Investment Securities. He served as the company's chairman until his arrest in 2008 for committing the largest Ponzi scheme in history.
Over the course of 17 years, Madoff defrauded more than 40,000 investors out of more than $65 billion. He was sentenced to 150 years in prison, forfeiture of $17.179 billion USD, and received a lifetime ban from securities industries.
Madoff died in prison on April 14, 2021, at the age of 82. He is considered by many in the finance world as the ultimate evil. His death and legacy will haunt the financial industry for years to come.
Advisors Regaining Trust
Madoff’s Ponzi scheme exposed a troubling reality: many people lack financial literacy and a clear understanding of what financial advisors actually do. While Madoff’s actions were extreme, his case serves as a reminder that advisors must clearly communicate how their practices differ from fraudulent operations.
One major red flag was that Madoff acted as custodian for his clients’ assets—this means he had complete control over them. He also created his own account statements, which were falsified. A trustworthy advisor uses a third-party custodian to hold client assets and generate independent statements.
Even if you aren’t financially savvy, your advisor should be transparent and willing to explain what they’re doing with your money—earning your trust rather than assuming it.
Avoiding Another Madoff
To avoid falling into the hands of someone like Madoff, make sure your advisor isn’t overseeing every aspect of your investing. Here are a few questions to ask:
Who is selecting my securities?
Who is executing my trades?
Who is keeping custody of my assets?
Who is verifying my performance?
An advisor may select your investments—but if they also control your trades, custody, and reporting, be cautious. Madoff had full control over all of these, and even had a complicit outside auditor to sign off on falsified returns.
Research, Research, Research
Before hiring an advisor, you can look into their background using tools like the SEC’s Investment Adviser Public Disclosure and FINRA’s BrokerCheck. You can also check with your state’s securities department or insurance commissioner for any adverse actions.
Keep in mind, about 5% of advisors receive a complaint during their careers—similar to doctors or lawyers. Some complaints may be baseless, but some hold weight. Madoff himself was fined $15,000 in 2005 for withholding information from the NASDAQ exchange.
To Wrap Things Up
It’s been over a decade since Madoff began serving his sentence, but his recent death has understandably stirred up concerns about the trustworthiness of financial advisors.
At NEST Financial, we value transparency and trust above all. If you’re concerned that your current advisor might not be operating in your best interest—or if you just want peace of mind—contact us to set up a no-commitment introductory meeting. We’re here to earn your trust and help you feel confident in your financial future.