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14 min 07 sec
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How to Smell a Rat: The Five Signs of Financial Fraud

Shows how to spot a crooked financial adviser before handing over your savings, using plain tests on custody, returns, strategy, fees and trust, drawn from the frauds of Bernie Madoff and Allen Stanford.

Table of Content

If someone manages your savings, the scariest risk is a person who quietly takes all of it, and a bad year in the market is mild by comparison. In How to Smell a Rat, investor Ken Fisher and financial analyst Lara Hoffmans point to the thread running through investment frauds: the adviser choosing the investments also controls the money. Bernie Madoff, exposed in 2008 after taking his clients for $65 billion, counted Steven Spielberg and the Elie Wiesel Foundation among those who trusted him.

The authors’ case is that swindlers like Madoff and Allen Stanford succeed by making checking feel unnecessary, and that a few plain tests bring checking back. Those tests cover who holds your assets, what honest returns look like, whether a strategy makes sense, and why glamour, generosity and friendship are weak evidence. Each one can be raised with an adviser in a single meeting, long before your savings are at stake.

Statements from your adviser can look flawless and still describe money that no longer exists. The fix is a structural choice most investors never think to ask about, and checking it takes a single question.

A manager who reports gains while your industries are crashing sounds like good luck. Stock market history since 1926 suggests a different reading, and even legendary investors would fail the test of perfection.

A pitch full of options, derivatives and conversions can leave you feeling slow for not following it. The authors treat that confusion as information, and they offer a simple way to tell a plan from a tool.

Being invited into a selective fund feels like recognition, and a lavish office feels like proof of success. Both feelings can work against you, and the real question is who ends up paying for the rug.

One adviser offers his expertise for nothing; another is famous for gifts to medical research. Two of the most notorious fraudsters played exactly those cards, and one even backed a law against fraud.

The friend who recommends a hairdresser rarely leads you wrong. With money, that same easy trust became one of Madoff’s most dependable tools, especially inside close-knit communities where nobody wanted to doubt one of their own.

Regulators register advisers, demand disclosures and run surprise inspections, yet frauds keep slipping through. One carefully chosen job description shows how, and why the last line of defense sits with the investor.

Every rat in this book needed the same thing from its victims: a reason to stop checking. Madoff supplied several at once. His clients felt chosen, admired his generosity, trusted the friends who brought them in, and accepted results they could neither follow nor verify. Stanford added a carefully worded registration and a public stand against fraud. Neither man required foolish clients. Comfortable ones were enough.

Fisher and Hoffmans turn that comfort back into a few plain habits. Keep your assets with an independent custodian and match its statements to your adviser’s. Distrust any record without bad years, especially across a year like 2008. Ask how the returns will be made and how the adviser gets paid, and accept only answers you could repeat to a friend. Let referrals, donations and shared clubs open the conversation, never settle it.

None of this calls for expertise in finance. It calls for the confidence to ask direct questions and the patience to confirm the answers. A rat can fake a smile, a reputation and a statement. Faking a second statement, from a custodian he does not control, is far harder.

About this book

What is this book about?

Most people who hand their savings to a professional assume that someone, somewhere, is watching. Bernie Madoff's clients, from Hollywood names to charitable foundations, assumed the same until 2008, when his $65 billion fraud came to light. Ken Fisher and Lara Hoffmans set out to show ordinary investors how such schemes work and how to catch them early. Their angle is practical. Frauds share a common setup, an adviser who controls the money, along with habits that keep clients from looking closely. These include returns that are too high or too smooth, strategies wrapped in jargon, exclusive invitations, lavish offices, free advice, showy donations and referrals through friends or community ties. Drawing on the cases of Madoff and Allen Stanford, the authors explain why each of these should make you look harder. Readers get a set of direct questions to put to any adviser and a clear reason to use an independent custodian. They also get a realistic view of what the US Securities and Exchange Commission can and cannot do for them.

Book Information

Rating:

Genre:

Money & Personal Finance

Topics:

Business Scandals, Investing

Publisher:

Wiley

Language:

English

Narrator:

Nora

First published:

July 9, 2009

Pages:

224

Length:

14 min 07 sec

Get the book:

Amazon

Who it's for

  • Savers new to advisers

    Savers about to hire their first financial adviser and unsure what to ask.

  • Clients of money managers

    Retirees and families who already hand their money to a manager and want to check the arrangement.

  • Invited into exclusive funds

    People invited into an exclusive fund through a friend, club or community who want to vet it first.

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About the Author

Ken Fisher

Ken Fisher founded the fee-only advisory firm Fisher Investments in 1979 and serves as its executive chairman. His Portfolio Strategy column in Forbes, begun in 1984, is the longest unbroken run by any columnist at the magazine. He has written research papers on behavioral finance and eleven books, four of them New York Times bestsellers. Lara Hoffmans is a Chartered Financial Analyst who worked at Merrill Lynch and Wells Fargo before spending 2004 to 2013 at Fisher Investments, where she co-wrote several books with Fisher. She is now vice president of marketing at Meketa Capital.

Ratings & Reviews

Ratings at a glance

4.2

Overall score based on 32 ratings.

What people think

Listeners find the book straightforward to grasp and a very worthwhile read. They value the advice provided, with one listener mentioning it is appropriate for investors of all experience levels and helps raise financial IQ. The work is also praised for enabling people to sidestep financial snares and pitfalls.

Top reviews

Aisha

Finally got around to reading this and I feel much more confident about my retirement savings now. This is a savvy guide to avoiding the charlatans and crooks who infest the financial world. Fisher makes a compelling case that we are often our own worst enemies when we fail to perform due diligence because of a 'trusted intermediary.' I loved the breakdown of why exclusivity is a red flag—it really changed how I view 'boutique' investment firms. The book is written in a very accessible way, making complex market trends and asset allocation easy to grasp for someone like me who doesn't have a finance degree. It’s well worth reading for the peace of mind alone. This is an essential manual for protecting what you've worked hard to build.

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Nathan

Protecting your wealth is just as important as growing it, and this guide makes that reality crystal clear. After hearing so many horror stories from 2008, I wanted a clear set of rules to evaluate my current advisor. This book delivered exactly that. The five signs of fraud are explained with great clarity, and I particularly appreciated the discussion on how fraudsters use social proof and exclusivity to bypass our natural defenses. Some might find the style a bit repetitive, but for a subject this important, a little repetition helps the lessons stick. It’s an easy read that manages to be both entertaining and deeply educational. I feel like my financial IQ has jumped a few points after finishing this. Highly recommended for anyone who wants to avoid financial pitfalls.

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Madison

Ever wonder if your financial advisor is actually a wolf in sheep's clothing? This book serves as a fantastic wake-up call for anyone who delegates their investment decisions to others. Fisher and Hoffmans lay out five very clear, non-negotiable warning signs that should make any investor run for the hills. The most important takeaway for me was the rule about asset custody; if your advisor also holds the keys to the vault, you're asking for trouble. While some of the advice feels like common sense, the Madoff scandal proved that even smart people ignore the basics when they're dazzled by 'exclusive' opportunities. It’s a quick, punchy read that definitely helped boost my financial IQ. I’d recommend it to any novice investor who wants a solid defensive strategy.

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Teng

Ken Fisher has a very distinct, almost aggressive voice that won't appeal to everyone, but his logic is hard to argue with. Look, the financial world is full of rats, and this book gives you the cheese to bait the trap. I found the section on the 'Minds That Made the Market' in the appendix to be surprisingly enlightening compared to the rest of the text. The primary value here is the reinforcement of basic safety rules: don’t give custody to your advisor, and don’t buy into strategies you don’t understand. It’s a simple, straightforward primer on how to spot shucksters before they can do real damage to your portfolio. While it’s aimed at novices, even experienced investors can benefit from a refresher on why 'perfect' returns are usually a sign of fraud.

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Yulia

As someone who isn't a Wall Street pro, I appreciated how accessible Fisher made these concepts without making me feel like an idiot. The book provides a very helpful framework for identifying potential scams, focusing on things like the lack of an independent custodian and 'murky' investing strategies. Personally, I think the advice on avoiding accounting fraud was the highlight. It isn't a particularly 'deep' book, and if you're looking for complex financial analysis, you'll be disappointed. But for the average person trying to make sense of the investment landscape, it’s a great tool. It’s a bit repetitive, yes, but the message is vital enough that it’s worth wading through the extra verbiage. A solid guide for staying safe in a risky market.

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Charlotte

The advice in this book is absolute gold, but the delivery is a bit of a slog to get through. Not gonna lie, I found myself getting frustrated with how often the author repeats himself within the same chapter. It feels like this could have been a very impactful thirty-page pamphlet rather than a full-length book. To be fair, the five signs of a financial rat are essential knowledge—especially the warnings about 'too good to be true' returns and murky investment strategies. I appreciated the chapter on the history of scams, but I wish there was more technical detail on how to spot accounting red flags. It’s a very good reminder for seasoned investors and a decent primer for beginners, even if the tone is a bit overly conversational and self-promotional at times.

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Suphan

Listening to the audiobook version was probably the right move for this particular title because the conversational tone translates better to audio than to paper. In my experience, Ken Fisher’s writing can be a bit polarizing because he is constantly reminding you of his pedigree and his other publications. However, the core message here is undeniably sound. The five warning signs—especially the one about investment strategies that sound like 'gobbly-gook'—are practical tools that every person should have in their kit. The book can be incredibly repetitive, which is why I’m giving it three stars instead of four. It’s informative and occasionally even exciting when he’s detailing old-school cons, but it definitely needed a more aggressive editor to trim the fat.

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Talia

Truth is, you could probably summarize the entire thesis of this book on a single index card and not lose much of the value. It feels quite bloated with 'half-sentences' and exclamation points that make it feel more like a transcribed speech than a polished book. That said, I cannot deny that the 'five signs' are crucial for any investor to internalize. I actually found the recommended reading sections at the end of each chapter to be the most valuable part of the whole experience. Fisher points you toward some truly great classics on market history and psychology. If you can tolerate the constant self-promotion and the disjointed structure, there is a very solid core of advice here. It’s a decent enough read, but far from a masterpiece of financial literature.

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Bunyarit

Let's be real about the writing style here. This book reads exactly like a series of dictated notes taken during a long commute, then hastily slapped together into a manuscript. It is incredibly repetitive, hitting the same three points over and over until you're tempted to skip ahead several pages just to find a new thought. Fisher spends a huge amount of time patting himself on the back and referencing his own other works, which gets old very fast. Frankly, the only redeeming quality is the curated list of recommended reading at the ends of chapters. If you want a deep dive into the mechanics of fraud, you'll be disappointed by the surface-level anecdotes provided here. It’s not a complete waste of time, but it certainly isn't the masterclass it pretends to be.

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Laor

Picked this up hoping for a deep dive into forensic accounting or a play-by-play of the Madoff scandal, but what I got was much thinner. Glancing at the title, you’d assume Fisher would walk you through financial statements or provide technical hints on how to catch a fraudster in the act. Instead, the book stays strictly at the surface level, offering broad generalizations that most savvy people probably already know. The stories of various scams are told in bits and pieces rather than cohesive case studies. It feels more like a long advertisement for Fisher’s firm than a serious educational tool. If you are totally new to investing, you might get something out of it. Otherwise, you’re better off reading the books Fisher recommends in his own bibliography, as they have much more substance.

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Questions about this book

Ken Fisher and Lara Hoffmans argue that financial fraudsters succeed by giving clients reasons to stop checking. They show how to spot the warning signs: an adviser who holds your money, returns that are too high or too steady, strategies hidden in jargon, exclusivity and luxury, free advice, showy donations and referrals through friends or community. Their examples come mainly from the frauds of Bernie Madoff and Allen Stanford.

The common thread the authors find across investment frauds is an adviser who controls the client’s assets. If the person choosing your investments also holds your money, he can take it and cover the loss with false statements. Their remedy is an independent custodian, a financial institution that safeguards your securities, verifies transactions and sends its own statements you can compare with your adviser’s.

Real markets swing widely. The authors cite Global Financial Data showing that two thirds of yearly S&P 500 returns since 1926 were below zero or above 20 percent, and global stocks fell 41 percent in 2008. Promises of 40 or 50 percent a year have come from fraudsters like Charles Ponzi. Even famous investors such as Warren Buffett were wrong about 30 percent of the time, so a record without bad years deserves suspicion.

Only partly. The SEC requires larger advisers to register and disclose details on Form ADV, runs surprise inspections and enforces securities law. But the authors note it rarely detects fraud in advance, lacks the resources to watch every firm, and can be fed misleading paperwork. Allen Stanford listed himself as an indirect owner and so avoided disclosing a past bankruptcy. Final responsibility rests with the investor.

Ask who will hold your assets and insist on an independent custodian. Look for bad years in the adviser’s record. Ask for the strategy in plain words, and walk away if you can’t repeat it. Find out exactly how the adviser is paid. Treat exclusivity, a lavish office, charitable giving and a friend’s referral as reasons to look closer rather than reasons to trust.

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How to Smell a Rat

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