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Decoding the Ponzi Scheme
When news broke that investment advisor Bernard Madoff had allegedly swindled investors out of $50 billion in one of the largest Ponzi schemes in history, many people worried about their own investments. But what is a Ponzi scheme, and are you at risk?
Also known as a pyramid scheme, the fraudster lures unsuspecting investors to put up money – sometimes their entire life savings – with promises of big returns and no risk. But instead of investing the victim's funds, the schemer uses the money to pay returns to previous investors. This "robbing Peter to pay Paul" method falls apart when the swindler flees with all the proceeds or when there aren't enough new investors to reimburse the old ones.
Here are a few tips when searching for a reputable financial advisor:
- Don't just rely on recommendations from friends and family. Find out how long the financial advisor has been in business and if there have been any complaints filed through your state's securities regulator.
- Be wary of any investors pitching exotic or obscure financial products. Make sure you understand what you're investing in.
- Stay away from any investors promising no risk and unusually high or steady returns.
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