A number of people advised me not to write a column involving fraud and charities, especially religious-based charities, because they considered it controversial. As I was deciding whether or not to do so, a good friend advised me that the potential controversy is exactly the reason why I should write such an piece, so here goes.

I was recently watching an episode of “American Greed” that profiled a financial fraud perpetrated by a religious organization. I was moved by this episode because, many years ago, my wife’s uncle was defrauded by his church before he passed away.

Before proceeding, it is important to note that this column is not about any particular religion or charity. That’s not the point. My interest is in pointing outthe differences between making a charitable donation and making an investment.

Charity often involves the act of donating money to a particular cause. When making donations people generally do not expect to get their money back, but rather take it on faith their money will be spent wisely in support of their charity.

Conversely, when making investments people not only expect to get their money back, but also expect some form of capital appreciation and/or interest or dividend income. Because investments can, and do, fail for any number of reasons successful investors take nothing on faith when making investments.

In the aforementioned episode of “American Greed,” a religious organization that was funded by the charitable donations of its parishioners set-up an investment program for those parishioners. “Do good by doing good” was its marketing slogan, which helped to attract investors. However, the investment program turned out to be fraudulent, and many people lost their money.

Religious frauds can be particularly devastating because many people do not exercise the level of skepticism in evaluating such investments as they otherwise would. Note there is nothing wrong with making investments in companies or projects that are consistent with your belief system, so long as those investments are evaluated as investments, not as an extension of charitable donations.

Some things to consider when selecting an investment or money manager include:

  • The manager: Who is managing your money, what is their track record, and who is auditing their work? In general, an independent firm should audit a money manager’s books, and that auditor should have ample amounts of “errors and omissions” insurance to pay any legal claims that may be filed.
  • Assets under management (AUM): Money managers with large AUM should have large amounts of insurance to pay legal claims. When dealing with smaller money managers it is important to verify the existence and amounts of insurance they carry.
  • Investment approach: It is crucial to understand exactly how a money manager intends to invest your money. Once you know this you can benchmark, monitor and evaluate their performance over time.

If, after carefully evaluating a money manager, you decide to invest with them there are a number of things you can do to mitigate the risk of loss. First, do not have a large portion of your investable funds with any one manager. This is especially important when investing with smaller money managers. Second, when dealing with smaller money managers you should always have a lawyer review all legal documents for you. Third, if you begin to question the integrity of any money manager, demand your money back. And if you come to believe you may have been defrauded, notify law enforcement immediately.

Belief systems can help to inform investment strategies, but when it comes to selecting investments and money managers, absolutely nothing should ever be taken on faith.

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