Tips for protecting yourself against financial fraud

— -- Q: Since the Securities and Exchange Commission has missed massive scandals, like Bernie Madoff, how can investors protect themselves?

A: Investors have good reason to be disappointed with the SEC.

Before Madoff, the SEC failed to detect gigantic corporate frauds at Enron and Worldcom. Nor did the SEC raise a red flag when large financial institutions were loading up on risky derivatives that brought the financial system to its knees. Most recently, investors were stunned when Bernie Madoff essentially turned himself in, admitting he ran a giant Ponzi scheme, paying off some investors with new money invested by others.

Whether or not regulatory reforms will improve the effectiveness of the SEC remains to be seen. But it's clear investors shouldn't rely on the SEC to find problems in the securities industry. It's up to you to protect yourself. Here are some tips to help:

1. Check the record.The Financial Industry Regulatory Authority, or FINRA, provides a free BrokerCheck system that lets you see whether or not a broker or brokerage firm has been accused of wrongdoing before. You should check any broker or brokerage firm before doing business with them. The site is available here.

If you're checking a brokerage firm, you also want to make sure it's a member of Securities Investor Protection Corp., or SIPC. This organization is supposed to be a financial safety net for you if fraud is detected at the firm.

2. Spread your risk.This is a controversial opinion, but you might think about spreading your assets among financial advisers or brokerage firms. This would create some complexity in managing your assets. Still, putting money with different firms gives you several benefits. First, you'd cut your risk in case of a problem at any single firm. Second, you can compare the performance of the firms and take advantage of different research tools each might have.