Here are 5 red flags that should get your attention.
1. The background check doesn't check out
A search for Madoff's company on BrokerCheck betrayed problems that should have raised some concerns for investors. In August, Madoff's firm paid a $25,000 fine for failing to report accurate trading information. Altogether, the company had five complaints against it -- perhaps not enough to scare off investors but enough to merit questions.
2. You don't understand the strategy After Madoff was charged with fraud, some of his investors admitted they never fully understood his investing strategy. But because they were making money, many believed Madoff was simply smarter than they were.
But investors are supposed to know the formula, according to the SEC. The agency recommends that investors ask a litany of questions, including several about how the company makes money. Investors should understand the company's strategy and how it relates to past performance. If the answers don't make sense, don't be afraid to keep asking what may feel like dumb questions.
"We see too many investors who might have avoided trouble and losses if they had asked basic questions from the start," the SEC says in its investor information packet.
3. Your manager makes a bundle even if you don't
Investment advisers should be paid by you. Otherwise, don't expect them to work for you. Advisers who earn commissions for selling certain financial products have a strong incentive to direct their recommendations to what makes them money, not what is best for your financial future.
4. No one else is watching the books
Investors can protect themselves by ensuring that their investments must be cleared by an outside entity and audited by a large, reputable firm.
5. Your fund manager doesn't invest alongside you
"Find out: Does your fund manager eat his own cooking?" Kinnel said. "What that tells you is that the manager has aligned his interest with you."Unfortunately, a personal stake -- or lack thereof -- isn't a clear indicator. Madoff's own family charity had about $19 million invested with his company. Some fund managers, such as those who manage employee pension funds or municipal accounts, may be barred from participating in the funds they manage.
Still, it doesn't hurt if your fund manager stands to make a lot of money when you do -- aside from the fees he or she charges, Kinnel said.
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