This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Don't Be an Investment Sucker

NEW YORK (TheStreet) --I recently read a complaint about another investment advisor who allegedly defrauded his clients.

According to the Securities and Exchange Commission, the person involved was purportedly running a Ponzi scheme. So what was the hook the advisor used to lure investors? If you guessed investor's greed you would be correct.

The investment advisor reported high investment returns of 17% to 25% every year. For example, the firm's marketing materials claimed a 24% return during 2008, a year in which the S&P 500 declined by 38.5%. Unfortunately for investors, the returns were a work of fiction and were completely made up.

So what could investor's have done to protect themselves? The single most important protection from my standpoint is avoid investing with firm's that self custody (remember Bernie Madoff?). I recommend working with an advisory firm that has an independent custodian (Fidelity, Schwab, and TD Ameritrade). The firm's clients all receive a monthly statement directly from the independent custodian. The statement will show exactly what the client is invested in and whether the investments have gone up or down.

The advisor involved in this case was able to carry out his scheme because he created false account statements showing made up performance. Remember a statement from an independent custodian is only useful if you flip through it!

Another way investors can protect themselves is to make sure they understand the purported investment strategy. Allegedly this firm had 75% of the investments tied to major stock market indices. If that were really the case it would be very difficult for them to generate a +24% return in 2008. Why is that? A 75% allocation to equity indexes in 2008 would likely have generated an almost 30% loss. A strategy starting almost 30% in the hole is not likely to produce a total return of 24% for the year.

How do I know this? Assuming the remaining 25% of the portfolio returned 100% the fund still wouldn't be break even. To get anywhere near a 24% return the other 25% of the portfolio would have needed to return over 200%. My math is clearly an oversimplification but directionally I think it makes the point.

If investing due diligence is not your thing, hire a third party to assess a firm's investment strategy. The professional you hire can assess the strategy and assess whether it makes sense or not. If the advisory firm is unwilling to explain their strategy and magical black box thank them and walk away..... no, better yet run as fast as you can!

--By Michael Maye

Michael Maye is the founder and president of MJM Financial Advisors (www.mjmfinadv.com), a registered investment advisory firm in Berkeley Heights, N.J. He is a member of the National Association of Personal Financial Advisors (NAPFA) and has been a speaker covering tax topics at NAPFA's national and regional conferences. Maye has also been a frequent contributor to the Star Ledger of New Jersey's "Biz Brain" and "Get With the Plan" articles. In addition to NAPFA, he is a member of Financial Planning Association, American Institute of Certified Public Accountants, New Jersey State Society of CPAs and the Estate Planning Council of Northern New Jersey.

Follow TheStreet on Twitter and become a fan on Facebook.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,503.39 +1.74 0.01%
S&P 500 1,879.63 +4.24 0.23%
NASDAQ 4,150.5360 +23.5690 0.57%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs