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Financial Happenings Blog
Saturday, January 24 2009

Unfortunately investment fraud is most certainly a risk for investors to consider when setting up and maintaining investment portfolios.  The Madoff affair in the USA has caused waves throughout the world.  In Australia, some might say that even though the Storm Financial saga was not about fraud, misleading behaviour might have been at play. (This looks set to be tested in the courts.)  So how do investors protect themselves from getting caught out by fraud or misleading behaviour?

I am a candidate in the Chartered Financial Analyst (CFA) program.  As part of this I get access to some very useful resources that I hope to share with my clients and users of this website.  One of the latest publications from the CFA Institute looks at 10 tips on avoiding investment fraud and this was written in response to the Bernard Madoff Hedge fund Ponzi scheme in the USA. (for the original article -

Here are the 10 tips and a response to how our approach rates on each tip:

1.      Understand clearly the investment strategy - our philosophy and the philosophy of the fund managers we favour is clearly set out and publicly available -,,,

2.       Match investment strategy to reported performance - The old saying rings true, "if it sounds too good to be true it probably is".  The index based approach we use to build client portfolios is transparent.  For example, if you hold an ASX200 Index Fund you know pretty much exactly the underlying companies you are invested in and returns should be very similar to the widely reported returns of the ASX200.

3.      Watch for e-mail solicitations and Internet fraud - our firm nor the fund managers we favour do not send out unsolicited communication.

4.       Be wary of "sure things," quick returns, and special access - Our philosophy is anything but these things.  The only "sure thing" we are offering clients is that their returns will be very close to index returns less a small amount for fees with some upside from investing in the small, value and emerging markets areas within asset allocations.

5.       Understand what, if any, regulatory oversight exists - In Australia, financial advisers and managed funds are regulated by ASIC or APRA (for superannuation funds).  We have not yet seen the failure of a managed investment scheme through fraud in Australia.  All the funds we use have annual reports publicly available on their websites along with external audit reports.

6.      Assess the operational risk and infrastructure - It is important that an investment firm has separate, independent operations for asset management, trading, and custody to provide checks and balances against fraud.  The funds we utilise have these checks and balances.

7.       Ask about independent audits and who performs them - the three fund managers we use for client portfolios have their annual reports along with audit reports publicly available on their websites.

8.       Assess the personnel - Our credentials are clearly set out on this website.  In terms of the fund managers we suggest, the index approach to investing takes a lot of this risk off the table because you as an investor are now investing in the whole of the market not just a couple of companies.  Dimensional (DFA) add a few more touches to their investments through incorporation of the 3 factor model and investments in emerging markets.  They clearly set out the personnel on their investment committees in their PDS and on their website and also highlight the links back to the world renowned scholars, including Nobel prize winners for economics on who's research they base their approach to investing.

9.       Perform a background check - you are able to perform a check of my authorised representative status along with the financial services license of the fund managers we suggest clients use at

10. Limit your exposure - Our approach is that we suggest clients hold a really well diversified portfolio in terms of what they are invested in.  This is a key reason why index style investing works.

On point 10, some ask the question - is it safe to have a large part of our investments with one fund manager such as Dimensional?

Our response is that in Australia, given the strong regulation by ASIC along with the structure of the investment trusts through using trustees and further supported by the transparent nature of the investments i.e. index style funds where you have a really good understanding of what the underlying investments, we are really confident that the need to diversify between fund managers is small.

Of course, these tips cannot guarantee that you will avoid investment fraud but they will increase the likelihood that you will make smart choices. Also, by asking the right questions and arming yourself with relevant information, you become one of the informed investors who are more difficult prey for scam artists.

Scott Keefer

About CFA Institute

CFA Institute is the global association for investment professionals. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has 100,000 members, who include the world's 86,700 CFA charterholders, in 133 countries and territories, as well as 136 affiliated professional societies in 57 countries and territories. More information may be found at

Posted by: Scott Keefer AT 02:24 am   |  Permalink   |  Email
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