Can You Avoid a Madoff-Style Ripoff?

Registered representatives are brokers who sell securities and insurance products and may be affiliated with a large Wall Street firm like Smith Barney, a local bank or an independent broker dealer you've never heard of. Registered representatives typically get paid by commission and may put their interests ahead of a client's provided the investments they recommend are deemed "suitable."

Brokers are registered with the Financial Industry Regulatory Authority, or FINRA, which maintains the BrokerCheck Web site at www.finra.org/brokercheck.

Do you exercise discretionary or nondiscretionary authority?

Discretionary authority gives an adviser blanket permission to buy or sell investments on your behalf without seeking your approval on each and every transaction. The adviser should be following guidelines agreed upon ahead of time, but otherwise he or she has authority to make changes as deemed appropriate.

Nondiscretionary authority means the adviser must seek prior approval before carrying out a recommended transaction.

Discretionary authority is a customary practice and perfectly appropriate for many investors. But make sure you understand what it means, and what type of authority you've granted to your adviser.

Asking the above questions, of course, does not guarantee you won't fall victim to a skilled scam artist like Bernard Madoff, but it will certainly make it much less likely. Healthy skepticism is your best defense.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.

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