Investment advisers have a fiduciary responsibility to put their client's best interest first. Brokers must make sure investments are "suitable" for the clients, which doesn't necessarily mean the investment will have the lowest commission.
This could change, though. The Obama administration's proposed regulatory reform calls for brokers to have a fiduciary duty to clients.
Watch for red flags
Madoff claimed returns of 10 percent to 12 percent year after year. No one can produce such consistently high results.
"Here you had to ask, 'If Warren Buffet couldn't do this, how could Bernie Madoff do it?' " says Leonard Rosenthal, a finance professor at Bentley University.
Be wary when advisers claim investment returns that are much higher than what similar investments are earning. "They can't do that without taking a lot of risk," Rosenthal says. Madoff didn't take just anyone as a client, and his investors often felt lucky to be allowed to join his exclusive club. Exclusivity is often part of frauds because it "just pulls people in all the time," says Lubin. "You can get something that you can't get elsewhere."
Look for outside custodians
Madoff served as the custodian of his clients' assets, and thus was able to fabricate statements that showed investors were making money.
Choose an adviser that has an outside custodian, say Charles Schwab or TD Ameritrade, that will hold your assets and generate independent statements. Plus, you can always call the outside custodian to double-check your balances.
Similarly, look for an adviser with a reputable, recognizable auditor, says Fred Joseph, president of the North American Securities Administrators Association. Madoff's auditor was a tiny, unknown firm, unusual given the billions of dollars he managed, Joseph says.
Diversify
Many of Madoff's clients invested their entire savings with him, and their lives were upended when they lost all their money. "Simple advice, but very effective: diversify. Don't put all your assets with one manager," says Brian Bruce, a finance professor at Southern Methodist University.
Interview prospects
Meet with at least three professionals before hiring one. Ask advisers about their education, training, work experience and how they are compensated. Find out if the adviser has experience working with clients in your situation, say, a 25-year-old just starting out or a 60-year-old needing retirement and estate planning, says Gerri Walsh, vice president of investor education at FINRA.
