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 I read yet another article today about the Bernie Madoff scandal. This one was concerning the fact that a pension plan, that lost a sizable amount of money because of its investment in a Madoff fund, fired their consultant. It got me to thinking that I haven't seen much about the fallout on advisors from the Madoff mess. And that got me thinking about the processes that advisors use in conducting due diligence on the investment managers they recommend to clients.
If one considers Madoff just another managed account provider, he falls into a category that advisors recommend to their clients all the time. And if you consider how many RIAs are out there offering investment management services, probability would say that it's likely he is not the only crook in the neighborhood. Finally, Madoff is proof that being big is not a guarantee that the manager is honest, or for that matter, competent.
Clients look to their advisors to be the industry insider; the one who works full time in the investment business and knows who the players are, what each does well and can match the objectives of the client with the capabilities of the manager. If clients were satisfied relying on just the large household names, they wouldn't need advisors. If advisors didn't search out the start-ups and boutiques, there wouldn't be any firms that over time might grow into new household names.
The combination of the market crash and the Madoff scandal is likely to lead to some changes in the expectations clients have regarding their advisors. The due diligence that an advisor does before recommending an investment manager will become more important. Clients are going to want to be reassured that they won't find themselves holding an empty bag for another con artist. Many will want to know the steps taken to check out the manager. Some will want to see the raw data. Clients are now forewarned, and advisors need to be forearmed with the evidence that will reassure them that the investment managers the advisor recommends are firms they can trust with their money.
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