Five Ways to Avoid Getting Madoffed

By now the entire investing world knows about the huge fraud perpetuated by Bernard Madoff. (Don't miss "Bernard Madoff: What You Need to Know") While no one can excuse his actions, there were many warnings signs that investors ignored.

Simply put, when it comes to selecting an investment manager or any investment vehicle, you need to be a truly informed consumer. This is true whether you're putting your money into a hedge fund, mutual fund or a separately managed account.

I wrote a letter to all of my investors that explained how LakeView Asset Management (my firm) has built-in safeguards to prevent a Madoff-like fraud. So what are a few things that, as an investor, you should look out for and ask before you select an investment advisor? Here are five key questions.

1. Is the Advisor Registered?

Ask the advisor if they are registered. If not, then act cautiously. I might be prejudiced in my belief because LakeView is a Registered Investment Advisor. However, investors should be comforted by the added level of scrutiny that registered advisors must go through and the information that is available to them.

What kind of information?

There are annual updates to the company's disclosure documents known as Forms ADV and ADV Part II. You can search public records for the advisor right on the Security and Exchange Commission's Web site (direct link). Furthermore, a registered advisor is required to provide each potential client their Form ADV Part II prior to commencing an advisory relationship. (I make my ADV Part II publicly available on my firm's Products & Services Web page. Also, all representatives of the RIA must pass a licensing exam and be registered with regulatory bodies. You can check on those individuals to see if they have had any complaints or violations in the past. Can you say the same for an unregistered investment advisor or hedge fund manager? No.