text: Just as banks have always attracted robbers, the money management business has always attracted charlatans. Lately we've seen more than the usual share of frauds and Ponzi schemes, with Bernard L. Madoff's scam as the largest and most noteworthy.
  
  What's an investor to do for protection? One simple answer is to entrust your assets directly to a well-known member of the mutual fund business. For investors who prefer to work through a brokerage, financial advisory firm or alternative asset manager, however, here are five steps I recommend:
  
  Insist on a Third-Party Custodian Don't let the money manager or an affiliate retain control of your assets. Instead insist that they be physically deposited in an unaffiliated institution with which you're familiar, such as a major bank, like State Street ( STT - news - people ), or a well-known wire house such as Charles Schwab ( SCHW - news - people ) or TD Ameritrade ( AMTD - news - people ). Any check you write to invest or transfer funds into your account should be made out to the custodian--not the manager you hired.
  
  Once your account is operating, you should receive monthly or quarterly reports from the third-party custodian. You can then compare the reports with those from your money manager and track your assets. The chances a custodian would be in on a fraud are slim, but even if it were, the firm would likely have insurance to cover investor losses. Firms that are members of the Securities Investor Protection Corp. and bear the "Member SIPC" designation provide insurance for up to $500,000 in fraud-related losses.
  
  Ask Lots of Questions Before hiring a money manger, be sure to pepper him or her with enough questions that you fully understand what you're investing in and how much risk is involved. Ask not only about average expected returns but also how much could you lose. Liquidity is another important issue; hedge funds and other alternative asset managers sometimes require multi-year lockups.
  
  If you decide to end your relationship, can you withdraw your money immediately or must you give three to six months' notice? Are there exit fees? Will all of your holdings have to be sold at a gain or loss, or can you transfer securities in kind? None of these are questions you want to ask for the first time after you've soured on a manger or need cash in a hurry.
  
  When in doubt, ask more questions. It's widely noted these days that prospective Madoff clients were told "Bernie doesn't like questions." Now, of course, we know why.
  
  Do Not Grant Discretionary Powers Turning to a professional money manager to advise you on how to invest can make a lot of sense. Granting that person carte blanche to move around your money without even consulting you is another matter entirely. In my opinion you can't--or shouldn't--trust anyone that much.
  
  Instead ask your money manager to state in writing what they are recommending and the specific investment vehicles they will use. Then they should not invest in any investments until you've approved. If a manager wants to make changes to your account or strategy, make sure you understand the reasons first. In some cases it may be simply to get you back to a previously agreed-upon asset allocation. If the manager recommends altering that strategy, make sure you understand the reasons and agree before making any moves.
summary: Investors need to keep tabs on brokers and money managers.