How to Smell a Rat Book Summary - How to Smell a Rat Book explained in key points

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How to Smell a Rat summary

Name: How to Smell a Rat
Rating: 4.2 (32 reviews)
Author: Ken Fisher and Lara Hoffmans

Ken Fisher Lara Hoffmans

The Five Signs of Financial Fraud

4.2 (32 ratings)

16 mins

Brief summary

'How to Smell a Rat' by Ken Fisher and Lara Hoffmans is financial self-help book that helps readers recognize and avoid financial scams, offering insights into common tricks used by those who take advantage of others.

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Leadership Investments

Table of Contents

How to Smell a Rat
Summary of 7 key ideas

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Key idea 1 of 7

What’s in it for me? Learn how to spot financial con artists and fraudsters.

What would you do if you lost all the money you saved?

It’s crushing just to think about, right? That’s why in the history of obscene crimes, Ponzi schemes have to rank near the top. What kind of soulless psychopath steals people’s hard-earned money by the billions, while smiling right to their faces?

It’s hard to think of all the people who lost everything they had worked so hard to save up, but they were up against truly terrifying forces. People like Bernie Madoff and Allen Stanford were incredibly sneaky and clever about how they won clients’ trust; and they were so ruthless they even bankrupted charities and community organizations.

That’s why these blinks focus on knowing how to protect your investments, spotting these kinds of conmen, and ensuring your hard-earned money is safe.

In these blinks, you’ll learn

the telltale signs of a con;

why fraudster Allen Stanford hired anti-fraud lobbyists; and
why the U.S. Securities and Exchange Commission won’t save you from being had.

Make sure your investment adviser doesn’t also have custody of your assets.

From celebrities like Steven Spielberg to charities like the Elie Wiesel Foundation, many people entrusted their money to investment specialist Bernard Madoff. Yet, in 2008 Madoff was revealed as a fraud who had swindled his clients out of a whopping $65 billion.

How can you avoid a similar fate?

There is a common thread across investment fraud: a financial adviser has been given control of the assets.

So whenever you do any type of investing, don’t place your money and assets into just anybody’s hands. Instead, employ a custodian, i.e., a financial institution that safeguards your securities (either physically or electronically), and keeps you informed about your accounts.

Custodians minimize the risk that your money will be stolen or squandered, as they act as a buffer between your money and the financial adviser, and have neither access to your accounts and investment profits, nor do they win a commission when you buy certain stocks.

They ensure that none of your money mysteriously disappears, bar third parties from withdrawing your money without your express consent, and verify every investment and transaction.

With a custodian, you can access your accounts online 24/7, and they also provide their own account statements, which you can cross-check with those your investment adviser provides.

But if your custodian is also the person who makes your investment decisions, you’re in trouble.

Usually, your financial manager can trade on your behalf, but can’t remove your money from your account because he is not your custodian.

But if you give your financial adviser custody of your funds and allow him to invest them directly – if he is unscrupulous – then you’ve unwittingly enabled him to line his own pockets with your money and then cover his tracks with false or misleading account statements.

With no independent custodian’s statement with which to compare your statements, it’s easy for you to be scammed, and hard for you to do that math.

If an investment adviser’s returns on investment are constantly great, look out.

You’re on your way to meet your money manager – nervous, because industries you’ve invested in are nosediving. However, at your meeting, your manager tells you that your portfolio is doing great.

Is it time for a sigh of relief? Not necessarily. It could simply be the case that you’re being lied to.

Your adviser should be able to explain investment strategies in layman’s terms.

“Try our new, time-tested money making strategy today! We’re arbitraging away proprietary options and employing a split-strike conversion to insure your investment!”

Could you understand any of that? No one can. Yet, this is often what investment jargon sounds like to the inexperienced.

Be weary of flashy displays or exclusivity.

Bernie Madoff advertised his funds as being “exclusive.” To invest with him, you first had to be introduced by a trusted source. Being accepted by Madoff must have felt being granted access to an elite social club – it most certainly didn’t feel like handing over all your money to a fraudster.

Exclusivity itself doesn’t mean much. If an adviser claims to cater to an exclusive, elite group of clients, it could mean a number of things, but it could also just be a trick. Some people find things more desirable if they’re difficult to obtain. For them, having an exclusive adviser feels like a great achievement. But in their eagerness to “join the club,” they become less likely to question their adviser’s investment tactics.

Charity donations or a good reputation aren’t proof an adviser is trustworthy.

Imagine you’ve met with your financial adviser for the first time, and he offers to manage your money for free. You get all his expertise and he gets nothing. Sounds like a great deal, right? Why should you leave his office only to have to seek out another adviser whom you’ll surely have to pay?

The truth is, financial advisers don’t work for free. No matter what, your adviser is going to get paid. If you don’t pay him, then he’ll make money other ways, e.g., through product recommendations. This can represent a major conflict of interests – between your interest and the interests of those who are paying your adviser.

A friend’s recommendation or overlapping social circles is not enough to vet an adviser.

When you’re searching for a place to get a good haircut, all you have to do is ask your stylish friend for a recommendation. But when it comes to financial advisers, your friends’ recommendations are suspect.

In fact, it’s definitely not in your best interest to choose your financial adviser based solely on your friends’ recommendations.

The SEC can help, but ultimately, it’s up to you to make sure your money’s safe.

Part of the U.S. Securities and Exchange Commission’s (SEC) mission is to keep investors safe from fraud. But what exactly do they do? And why are there still so many rats out there?

For one, the SEC ensures high standards of transparency for big-time advisers. All companies and individuals who receive compensation for their investment advice must register with the SEC if they manage at least $110 million worth of assets (unless they only manage hedge funds).

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What is How to Smell a Rat about?

How to Smell a Rat gives you the tools you need to avoid becoming the victim of financial fraud. It catalogs legendary fraudsters’ favorite tricks.

How to Smell a Rat Review

How to Smell a Rat (2009) is an essential read for those who want to protect themselves from fraudulent schemes in the financial world. Here's why this book stands out:

It provides practical, eye-opening advice that helps readers detect and avoid scams, ultimately safeguarding their investments and financial well-being.
By exposing common red flags and revealing the tactics used by fraudsters, the book empowers readers to make informed decisions and protect themselves from potential harm.
With its engaging anecdotes and real-life examples, the book ensures that the topic of financial fraud remains interesting and relevant throughout its pages.

Best quote from How to Smell a Rat

If the manager has custody, he can take money out the back door – any time he wants.

—Ken Fisher and Lara Hoffmans

Who should read How to Smell a Rat?

Investment novices
Anyone who is excited to jump on the bandwagon for the next great investment scheme
Anyone who is searching for a reliable financial adviser

About the Author

Ken Fisher is the founder, CEO and Chairman of the global money management firm Fisher Investments as well as the author of a number of New York Times bestsellers, including The Only Three Questions That Count and The Ten Roads to Riches. In addition, he has written the famous Forbes Portfolio Strategy column for the last 25 years.

Lara Hoffmans is a contributing author to Fisher’s bestsellers, and is also a content manager at Fisher Investments and a contributing editor for MarketMinder.com.

© [Kenneth Fisher and Lara Hoffmans: How to Smell a Rat] copyright [2009], John Wiley & Sons [Inc. or Ltd. as applicable] Used by permission of John Wiley & Sons [Inc. or Ltd. as applicable] and shall not be made available to any unauthorized third parties.

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