The recent revelation that 260 federal employees and annuitants and their families may have lost some $34 million to a crooked investment manager is a loud and clear wake-up call.
Wayne McLeod and his firm, Federal Employees Benefit Group, are accused by the Securities and Exchange Commission of defrauding a group of investors, many of them federal law enforcement personnel, in an apparent Ponzi scheme. According to the SEC, McLeod admitted perpetrating the scheme to investigators before taking his own life.
While this story is shocking and sad, it is also instructive. I met McLeod at a seminar several years ago and found him interesting, professionally. Among other things, he aggressively encouraged federal employees to move money from their Thrift Savings Plan accounts into retail investment accounts, presumably ones that he or his associates managed or were compensated for selling – a strategy I strongly oppose. Back then, I did some digging to see who he was and why he might be motivated to give what I considered to be poor advice.
I found that McLeod and his business were basically selling insurance and investment products on behalf of others; there was no mention at that time of the in-house investment fund that is now the subject of investigation. I found no evidence in publicly available materials that would indicate that he was a criminal.
Not so long ago, the idea that an investment scam would be targeted at federal employees would have seemed far-fetched. The investment industry has more or less ignored federal workers and retirees since much of their wealth is often tied up in their annuities, and investment managers couldn’t get control of it to siphon off those fees they like so much. But, the confluence of a tough investment environment and a dramatic increase in the number of six-figure TSP account balances has caught the industry’s attention.
As attention turns to the federal employee market, there is bound to be an increase in the frequency of fraud to go along with it. So, it’s important to be skeptical and vigilant when it comes to considering where to invest your money. Here are the best ways to make sure that what you pay for is what you get:
- Keep as much of your retirement money as you can in the TSP for as long as possible. There is going to be increasing pressure to try to convince you that you’ll be better off moving your money, after you retire, to this or that IRA account. Don’t believe it. I haven’t seen an investment opportunity yet that will provide you with better risk-adjusted returns than the TSP. The person most likely to gain from an investment move is the one who sells it to you.
- Avoid giving custody of your money to all but the largest, most reputable firms, and never to an individual. What all Ponzi schemes have in common – an attribute essential to their existence – is custody of client funds. If you or someone else wants to manage your retirement money, do so through an account at a reputable broker. It’s your brokerage account, and you get the statements every month. Your investment manager only has a limited power of attorney to direct trades in the account on your behalf, not to do as he pleases with the money. Bernie Madoff was able to do what he did because people made their investment checks out to his firm. His investors’ only way of knowing what he was doing with the money was to read statements that his firm produced.
- Don’t confuse nice with honest. I’ve never heard of a Ponzi schemer whom people didn’t like – before they lost their money. Ponzi schemers, and salespeople, are successful because they’re nice. I can’t tell you how many people have come to me over the years with stories about the really nice investment adviser who lost their money. That was, in fact, my first investment experience, and I’ve never forgotten it.
- Everything in life involves risk. More return generally involves more risk. Any time someone promises you oversized returns with undersized risk, you should be wary. That doesn’t automatically mean that they’re trying to mislead you, but you should be on alert, and if in doubt, just walk away.
Written by Mike Miles
For the Federal Times
Publication July 19, 2010