That billionaire Mort Zuckerman could fall victim to Bernard Madoff leaves average investors shaking in their boots. Brian Shea, vice president and regional manager of Wells Fargo’s Wealth Management Group, knows this firsthand. “This has hit a vein here,” he says. “It’s no surprise that we’re hearing from local clients that know someone hit hard by Madoff. Your money must be well diversified. We talk about that all the time, but we’re seeing so many investors who gave Madoff practically everything.”
No matter what entity you invest with, review your portfolio closely and often. More importantly, entrusting all your money to a single investment adviser — no matter how trusted — is risky business.
Due diligence was lacking among Madoff’s clients. Those involved claim he had an aura about him that precluded asking questions. “He was known to be evasive in communication and give black-box kinds of answers,” says Shea, who’s based in Palm Desert. Investors have the right to demand to speak directly to the person managing their money and making investment decisions — including direct portfolio and fund managers.
“There needs to be total transparency with money managers and quarterly meetings directly with them and not their intermediaries,” Shea says.
Check the backgrounds of people managing your money. Request client names, both past and present, and talk to their competitors.
In an essay published in The Wall Street Journal, psychologist and author Stephen Greenspan explored the reasons why wealthy people fall for shysters like Madoff. Greenspan, who himself lost money to Madoff, wrote, “The Madoff scam had social feedback pressures that were very strong. Newspaper reports described how wealthy retirees in Florida joined Mr. Madoff’s country club for the sole reason of having an opportunity to meet him socially and be invited to invest directly with him.”
Marc Beauchamp, a former NASDAQ spokesperson during Madoff’s tenure there, views it this way: “Madoff is a prime example of affinity fraud pure and simple, with unsuspecting victims believing something that was too good to be true.” Affinity fraud is a scam that targets members of a specific demographic group. “In Madoff’s case, his victims were wealthy and many were Jewish,” Beauchamp notes.
The first mistake Madoff investors made was entrusting hefty sums of money to an individual. “Anytime you deal with a sole proprietor or small shop, you can’t do the necessary due diligence you can do with a large firm,” says Jim Estes, associate professor of finance at Cal State San Bernardino. Madoff’s credibility was based on his wide network of friendships. It was difficult to identify the clearing broker, critical to ascertain when investing with a small company. You also want to see monthly and proxy statements directly from the funds in which you invest. “With computers and the various software programs available today, anyone who sets out to create fraud can,” Estes warns. “They can produce all kinds of bogus statements.”
Before giving your money to anyone, check with the Financial Industry Regulatory Authority (www.finra.org) to ensure they are licensed and to see what arbitration and mediation history they have. FINRA is the largest independent regulator for securities firms doing business in the United States. It oversees nearly 5,000 brokerage firms, about 172,000 branch offices, and approximately 665,000 registered securities representatives.
An SEC rule that loosened regulation for private brokerage firms such as Madoff’s has not been extended into 2009. Haddon Libby, chief financial officer of El Paseo Bank who spent years in private banking, considers that a positive move. “This is important that the SEC is fixing this rule, because the more you have people really looking over people’s shoulders, the better,” he says. Libby also points to “making sure your money is held by well-respected and recognizable custodians like Schwab, LPL, Bank of New York Mellon, or Fidelity.”
Most importantly, Madoff boasted to have only two down months in 20 years. Realistically, nobody can claim that kind of record. Who you invest with goes back to one simple guideline: Caveat emptor (buyer beware).