Ordinarily, when you are picking an investment manager or financial planner, you're given some common-sense advice. Avoid managers who are unknown, or unregulated, or come without good referrals, or haven't been in the industry long. But none of this would have saved you from Mr. Madoff. "This guy had oodles of referrals, at the highest levels," notes Duane Thompson, a managing director at the Financial Planning Association in Washington. "He was [former] chairman of Nasdaq. He'd been in business since 1960."
Still, there are other red flags. The key one: Look out for an investment manager who wants complete control of your money, and asks for checks to be made out to him or a company he controls.
You are safest when the funds are held separately, in custody at a big broker-dealer firm regulated by the Financial Industry Regulatory Authority and backed by the Securities Investor Protection Corporation. You can contact that firm directly to make sure it has your money, and you can check it out through FINRA. Get copies of your statements directly from the broker.
If your adviser manages your investments, but the funds are actually held at, say, Charles Schwab or Fidelity, it's almost impossible for him or her to run a Ponzi scheme. Other scarlet signals? Any broker who "guarantees" investment performance, boasts a track record that looks amazing, or who tries to hustle you aggressively into investing. And double-check any investment record that looks too steady over the long term: Ponzis like to keep the boat steady to avoid redemptions.