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Know WHERE Your Money Is

We all keep our money somewhere. For most all of us, money resides in a checking and/or savings account at a brick-and-mortar bank. Maybe a reputable online bank that is insured by the FDIC. Some of us may even have some cash in a home safe or a safety deposit box at that same brick-and-mortar bank. We know where it is, and how to get to it.

In what still remains the largest Ponzi scheme ever, I was recently reminded of the deviant doings of Bernie Madoff. If you worked in the financial industry in 2008, this may create some PTSD, as well. For those of you who don’t know about Bernie Madoff, who he was, what he did and the repercussions of his actions, the following is a quick reminder.

Bernie Madoff was a money manager and trusted face on Wall Street. Owning a legit trading/brokerage firm, Bernie was a successful individual in his craft. But, on top of his brokerage firm, he began a personal money management side of his business. This personal money management arm invested money for everyone from small individual investors and families to billionaires and large charitable organizations. The only problem was that this money was never invested, it was spent by Bernie (the true definition of a Ponzi Scheme).

The details of this story are deep and dark. Lives ruined, reputations shattered, funds meant to help those in need, gone. The 2008 financial crisis uncovered Bernie’s misdoings (among many others) and we were all reminded of how things like this happen. Nobody looked. As the great Warren Buffet quoted, ‘when the tide finally goes out you find out who is swimming naked.’ Bernie was in his birthday suit.

But beyond just the fraudulent side of things, I am continually reminded of how many investors not only have a vague knowledge of where their money is or how it is held, but what they are actually invested in. Maybe this refers to the mutual fund you invest in, the hedge fund that sounded like a great idea or the private equity fund that sounds sexy. The shiny new toy. Plus, anyone who is anyone is doing it. Right?

Investing is what makes our economy work. Without investing, ideas don’t evolve into solutions, companies don’t grow and produce jobs and lives are not bettered. On an individual level, investing in yourself with education and experience does the same thing. We need to invest to better ourselves and our financial situation. But, with any investing comes risk. Good financial planners educate. We educate on what we feel will be a good risk to take in order to reach one’s goals. Nothing more, nothing less. What investments have a good foundation and stability to get you across the finish line. Most importantly, we work to separate the good from the bad, the trustworthy from the shady. We look behind the curtain.

Take a step back and look at your own financial picture. Most of us have those banking accounts mentioned earlier. We have our 401k’s that are typically invested in well vetted mutual funds and indexed investment funds (BTW – the reason your 401k is not commingled and managed within your employer is also due to massive fraud that took place decades ago and created ERISA rules). We may also have individual brokerage accounts, possibly a mutual fund masquerading as a hedge fund and maybe even private equity (investing in non-public/growing companies)—think Facebook when it was just starting. Private equity is how these businesses become what they are today. The names of these funds and investments may sound great, but do you know what you are actually invested in?

Many well-known mutual funds are invested in a plethora of well-established stocks or bonds issued by those same quality companies. By owning the fund you likely own stocks like Pepsi, Amazon, Google, etc. When they grow, your account grows. Investing 101. But what about some of these other investments that sound a bit sexier? Hedge funds… do you know what they are doing? Have you asked your advisor to explain how this works? Would you still put your money there if they did? Maybe. How about private equity? What are some of these ‘start-up’ companies or real estate ventures they are investing your money into? Most people would want to know, but not enough look.

To be clear, looking behind the curtain at what you are truly invested in doesn’t mean you are looking for a scam. You are simply trying to understand what it is that you have entrusted your advisor to invest your money into. Education, whether it be as a patient at the doctor's office or consumer of financial services, is paramount.

Outside of personal investing, many of us are charitably inclined. Charitable organizations rely on us to fund their outstanding work for those in need. It truly takes numbers and heart. But once again, do you know where your dollars are going?

For one example, the non-profit ‘CancerCare’ spends only 6% of its incoming donations on overhead to run the organization—the rest goes to patients and families in need. This is excellent. Then, in contrast, let’s look at ‘Cancer Fund of America.’ This organization is reported to only spend 2.4 cents of every dollar you donate to actual cancer care. The rest goes to overhead and employee salaries. Let’s face it, you are donating part of your salary to someone else’s salary. Again, do your homework.

An insightful resource for many to understand the epic schemes of the past is from Ben Carlson, one of the great thinkers of our generation. Don’t Fall For It compiles true tales of some of the largest schemes that have swindled millions.

The Wealth Management and Financial Advice industry is continuing to be built on trust. It has to be. This doesn’t just apply to Financial Advisors, but Insurance Advisors, Real Estate Agents, etc. However, in the grand scheme of things, there are still way too many opportunities for investors to be defrauded. Granted, investing is inherent with risk. It has to be. But the risk shouldn’t lie within fraudulent advice or guidance. Investors need to do their homework, ask questions and perform their due diligence.

Bernie Madoff printed fraudulent statements on an outdated dot-matrix printer. He made up numbers on investment performance and clients ate it up like candy. It felt too good to be true—and it was. The thrill of the gain blinded many from what was behind the curtain. Human nature doing what it does best. The answers are always there. It just means asking the questions and taking a look for yourself.



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