4. Beware any adviser who uses a questionable auditor. An independent auditor should regularly examine the adviser's books and records to ensure that clients' money is being handled properly. Madoff hired a small auditing firm that reportedly operated out of a single 13x18-square-foot office even though he was handling billions of dollars in assets.
5. Beware any adviser who offers unusually high or steady rates of return. Every investor dreams of earning consistently high returns -- which are too good to be true. Madoff's investors received a monthly return of 1 percent for years and years. He even reported a 5.6 percent profit for the first 11 months of 2008 -- despite the fact that the stock market suffered a loss of over 40 percent. Claims of consistently good and unusually steady returns over a long period should be viewed with great suspicion.
6. Beware any adviser who touts testimonials. Past performance does not guarantee future results, which is why the SEC has restrictions on the use of testimonials. But Madoff built his entire business by word of mouth, currying favor on the social circuit at high-end country clubs.
7. Never invest in anything you don't understand. If you don't understand an investment or strategy, don't invest in it. Madoff refused to explain how he produced investment returns and clients joked that he put the money in a "black box." They're not laughing any more.
Although the news of fraud is discouraging, remember that it's nothing new. The country's first investment offering, issued by Alexander Hamilton in 1792, was the victim of insider trading.
So, despite such people as Bernard Madoff, you can succeed with your investments. Simply take the time to educate yourself and be aware for warning signs.
As the Romans said, caveat emptor. Buyer beware.