How to Smell a Rat | Kenneth L. Fisher

Summary of: How to Smell a Rat: The Five Signs of Financial Fraud
By: Kenneth L. Fisher


Dive into the world of financial fraud and learn how to protect your hard-earned assets with this summary of ‘How to Smell a Rat: The Five Signs of Financial Fraud’ by Kenneth L. Fisher. Through real-life examples, such as the infamous case of Bernard Madoff, this summary will teach you the importance of appointing an independent custodian and how to spot the telltale signs of shady financial advisers. Equip yourself with the knowledge to navigate the complex world of money management, and ensure your investments are safe and sound. Find the keys to recognizing fraudsters and learn valuable approaches to make smarter investment decisions.

Protect Your Investments

Avoid investment fraud by using a custodian to safeguard your money and assets.

Investment fraud can happen to anyone, including celebrities and charities who trusted Bernard Madoff with their money. The common thread across investment fraud is that a financial adviser has control of the assets. To avoid a similar fate, it is important not to place your money and assets into just anybody’s hands. Instead, employ a custodian, which is a financial institution that safeguards your securities either physically or electronically and keeps you informed about your accounts. Custodians act as a buffer between your money and the financial adviser, minimizing the risk that your money will be stolen or squandered.

With a custodian, you can access your accounts online 24/7, and they also provide their own account statements, which you can cross-check with those your investment adviser provides. However, if your custodian is also the person who makes your investment decisions, you’re in trouble. Giving your financial adviser custody of your funds to invest them directly enables them to line their own pockets with your money and cover their tracks with false or misleading account statements. Without an independent custodian’s statement with which to compare your statements, it’s easy for you to be scammed, and hard for you to do the math.

In summary, to protect your investments from fraudulent activities, ensure that you employ a custodian to safeguard your money and assets as the custodian acts as a neutral third-party between you and your financial adviser.

Signs of Deceptive Investment Managers

Be cautious of investment managers who promise consistent incredibly high returns or boast of consistent above-average track records. Extreme returns are not the norm, and even the best money managers have their bad years.

Investing in the market can be risky, and trusting your money with an investment manager adds another layer of uncertainty. The author of the book warns readers to be cautious of certain warning signs that could indicate a deceptive investment manager.

One of the main red flags is an investment manager who promises consistently high returns, especially returns of 40 or 50 percent. These types of returns are not realistic and have only been promised by master fraudsters in the past. While it’s possible for an advisor to have a few years of extraordinary returns, it’s highly unlikely that they could consistently beat the market by such a high margin every year.

Another red flag is a consistent above-average track record. Markets are volatile, and experiencing extreme returns is more common than consistent above-average returns. In fact, two-thirds of S&P 500 annual returns have either been below zero or above 20 percent. Even the best money managers have their bad years, and it’s crucial to remember this when assessing the success of an investment manager.

By being aware of these warning signs and using them as a guide, investors can make more informed decisions about who to trust with their money and avoid falling victim to deceptive investment managers.

Understanding Investment Strategies

Investment jargon can be confusing, but it’s essential to understand your investments. Don’t invest in a strategy you don’t understand, and be wary of advisers who can’t explain them in simple terms. Strategies are like blueprints, while tactics are tools to achieve them. Beware of flashy tactics marketed as strategies, as they may be scams. Always ask for a clear investment strategy before investing.

Exclusivity and its Perils

Exclusivity isn’t a good enough reason to choose an adviser; it neither brings down fees nor guarantees better returns. A client must question the investment tactics of the adviser and refrain from getting swayed by displays of opulence.

Access to an elite group of investors is certainly desirable to many as it brings along a sense of achievement, just like being accepted into an exclusive social club. However, exclusivity in an adviser could be an expensive pitfall, as was seen in the case of Bernie Madoff, who swindled investors by advertising his funds as “exclusive.” Investors should not be carried away by the so-called “elite” tag and must steer clear of advisers who carefully curate their clientele for unclear reasons. Although some advisers prefer dealing with certain investors based on investment size, exclusivity on its own is an insufficient reason to choose an adviser.

Further, flashy displays and extravagant expenditure should not be a measure of an adviser’s competence. Instead, it is essential to ensure that the adviser’s investment tactics meet the client’s interests. Any expenditure an adviser makes reduces the client’s profits, and hence, flashy displays could indicate incompetence or an attempt at distraction from the adviser. Therefore, a good adviser spends his time on investment strategies that bring profits rather than on expensive toys.

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