Financial Advisor Marketing & Technology

Marketing & Technology For Independent Financial Advisors

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Closing A Door On Madoff Opens A New Era

With Bernard Madoff scheduled to plead guilty tomorrow in U.S. District Court in Manhattan to charges of bilking 4,800 clients of $64.8 billion, a new era for investment advisors begins.

It’s an era of mistrust, where there is no such thing as a client who is a friend. It’s an era in which trust is founded on undisputable proof presented at repeated regular intervals. Advisory firms must proactively adjust their behavior and business processes to succeed in this fearful new world.

Madoff stole from friends and friends of friends—most of them part of the Jewish equivalent to a Good Ol’ Boy Network. In doing so, he violated a cultural compact in a way that affects most advisors.

The social contract that binds Jews, WASPs, Catholics, other ethnic or religious groups into a network is a deeply ingrained tradition in America, where our melting pot causes many of us to rely, trust, and favor those with whom we have shared values, traditions and a cultural connection.

In shattering that socal contract, Madoff made it impossible for you to expect people to trust you because you’re a Good Ol’ Boy, a member of their club. Advisors now must prove—even to members of their own social network—that they can be trusted.

Advisors should not wait for an investor to ask for such proof. In passively waiting for such an awkward moment, you risk creating doubt and worry in a client’s mind, and you may even lose the client. Instead, do whatever it takes to prove you are ethical, honest, and competent. And insist on the same proof from investment firms with which you work.

This Friday, Jason Scharfman, an expert in performing due diligence on the most complex and private investments, hedge funds, speaks at the Financial Crisis Webinar Series.

Scharfman, who has spent most his his career in due diligence, a year ago had the good sense to start writing a book about how to avoid frauds when selecting a hedge fund. Hedge Fund Operational Due Diligence was released in December 2008, just as the bear market forced out into the open a string of investment advisor Ponzi schemes.

Scharfman, founder of Corgentum Consulting, will speak about how an RIA can assure investors of its own legitimacy as well as how an RIA should perform due diligence on hedge funds.

Since many RIAs already invest in hedge funds, and most others are considering it, hearing how a due diligence professional does the job is valuable. (We all know that doing the most basic due diligence on Madoff's fund would have revealed that his audit firm was a two-person operation working out of a tiny room in a small town in upstate New York — and was certainly not what you'd get with a hedge fund managing billions.)

With investments in stocks now cut nearly in half from their peak values by the nation's economic collapse, many advisors will feel pressure in coming months to find ways to help clients recover. Hedge funds, despite their scandals and troubles of late, will remain a viable vehicle over the long run. However, as Madoff’s guilty plea illustrates, performing proper due diligence before investing in a hedge fund is not just prudent, but expected. And that investor protection process must now become part of your communciation strategy.

Join us for Scharfman’s presentation.

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