By Wayne Cooper, CEO, Wealth Management Exchange
As if investors didn't have enough to worry about after the brutal stock market declines of the past year, fear of bank and insurance company solvency and an economy that keeps getter weaker, the $50 Billion fraud of Bernard Madoff raises a whole other set of issues and risks for investors. This Ponzi scheme blowup has implications for investors and investment advisors.
There are actions all investors should take to mitigate the risk of fraud, and accredited investors in particular are at risk since we're allowed to invest in less regulated vehicles such as private partnerships and hedge funds because we're considered "sophisticated investors". The truth is, many large investors aren't sophisticated, and don't follow basic rules such as:
- Diversification: It's sad to see that many of Madoff's victims had large percentages of their net worth invested with him. Diversification should include asset classes and managers.
- Background Checks and Due Diligence: While it may seem superfluous, especially if friends are recommending an advisor, it's important to take a disciplined approach and dig deeper into the advisor's background, especially if that advisor is holding the assets. The truth is, many "sophisticated" investors skip this step, but they do so at their own peril.
- Cynicism: If a money manager's performance looks too good to be true, it probably is.
More Skeptical Investors
Madoff is going to make life harder for honest money managers too. There will likely be a lot more pressure to regulate hedge funds and money managers, and there will be a lot more skepticism from clients and prospects. Money managers would be well advised to be more proactive and transparent with their clients going forward and more willing to share their strategies, methods and holdings with key clients. And clients should demand this.
No doubt we will be learning a lot more about the Madoff fraud in the days and weeks to come. It will have broad implications on a host of critical issues affecting investors-upcoming legislation from Congress, possible new SEC rules and enforcement action, new initiatives in advisor-client relationships, rethinking investment strategies, just to name a few. Wealth Management Exchange will be following these events closely and reporting on what they mean to you and your investment planning.
