How to Smell a Rat

The good news is fraudsters often follow the same basic playbook. Learn the playbook and know how to ask the right questions and financial fraud can be easy to detect and avoid.

Sometimes the return of your money is simply a lot more important than the return on your money!

An age-old Western saying related to how to keep people from stealing things from your wide open spaces is: "Good fences make good neighbors".

History's biggest cases have one thing in common: the money manager or financial adviser also acts as the bank, broker or dealer—holding and supposedly safekeeping the assets he/she manages. Clients didn't deposit the money with a third party; they deposited the money directly with the decision maker.

The most legendary investors of all time have only been right about 70% of the time. Investing is a probabilities activity not a certainties activity, and being wrong 30% of the time is a perfectly marvelous success rate.

Above-average returns in the long term come with individual years that stink. And you need to accept that because it is in seeing the stinking years that you know a manager is actually honest.

Fraudsters claim not just fake returns, but fake returns that are consistently high, positive and better than what you could get normally from markets—no matter what stocks, bonds or other principle securities do.

If you see performance claims not followed by sufficient disclosures, something is likely afoot. The disclosures are there to detail how the returns were measured and calculated.

With the benchmark and the performance history, you can measure whether an adviser does a consistently good job or not. You want them to perform close to the benchmark, most of the time - that's a sign of an adviser doing a good job.

A non-rat adviser will never hesitate to openly discuss strategy; because a good strategy should be straightforward. If your adviser doesn’t or can’t explain the strategy more simply, be suspicious this is a common rat tactic.

It is central to all con artists that you not understand, because if you did, you would never give them your money.

Maybe your adviser is dully registered to both render advice and custody assets, and you think they have good reason for it. All wrong! If these are part of the sales pitch - sold to you somehow as benefits - be suspicious.

A good reputation may be ill got, and a poor reputation might be unfair. Either way, don't be too impressed with a sterling reputation or swayed by name calling—neither tells you anything about what someone actually has done or will do.

Laws and regulations don't eliminate bad behavior. Only you can protect you. The truth is, as Ben Franklin said, "God helps those who help themselves."

Con artists know folks are likely to trust referrals from friends and are very good at working that angle. While fine for finding a mechanic or baby sitter, this is a grave mistake when it comes to investing.

If you hire a rat who successfully embezzles, you may never see a dime of your money again. Knowing the signs of financial fraud is your ultimate defense against hiring a rat.

Market volatility can be tough to take, but every bear market is followed by a bull market. You can overcome bear markets with some time and toughness.