With most of the “Seven Deadly Sins” committed during the Market Cataclysm of 2008, all that is left for the rest of us is Anger!
The meltdown’s poster child, Bernie Madoff, had a much publicized affair with Greed, of course. But so too did the investors who Lusted after the opportunity for high “guaranteed” returns from the human T-bill, and those who jumped into this pool out of Envy of others already in the country club. Add to this the Gluttony of the fund-of-fund managers who couldn’t seem to get enough of what Bernie was cooking up, and the Pride of the advisors who placed client money with the modern-day Ponzi, claiming their due diligence was superior if not infallible. Compounding the pain was the Sloth of the regulators who appeared more methodical in ignoring the signs of malfeasance than in performing their duties, even when hot tips were rolling in.
The bad taste of being duped once again is rising in our gullets. The collapses of the Dot.coms, Enrons, and WorldComs should have taught people that “if it sounds too good to be true, it probably is.” But as long as there are “greater fools,” there will be greater foolers.
So much pain and anger over so many things out of our control. An e-mail I recently received from a friend represents a shout for help from the collective masses who wonder how so many smart people could have done so wrong. His missive was filled with despair. “I am on vacation,” he wrote. “It gives me time to listen to the news about the Madoff scandal. Along with everything else going on in the markets, this is causing me to lose all faith in Wall Street, the Securities and Exchange Commission, and the management of these firms who claim to be keeping the markets open and honest.”
My friend went on to describe how controls seem to work in so many places except the area where people make decisions based on good faith. He continued, “The thought of sitting down with an advisor and imagining for a nanosecond that the person has my [best] interests in mind seems an exercise for fools.” He painted a picture of how many so-called professionals packaged their message so neatly–but all he can see now is a conspiracy to separate him from his money. He concluded, “I’m so disillusioned that I will not be able to trust anyone offering financial advice–ever.”
Trust No One Over a Year Old
While it’s tempting to dismiss his screed as an irrational rant from an emotional man, no one who knows him would use any of these terms to describe him or his behavior. Put simply, he is disgusted–and as far as I can tell, he represents a very large group of individuals who have lost confidence in our securities markets and those who render financial advice. I heard the same contempt from a woman and her husband at the theater the other night, in a call from my brother, and in letters to the editor. These are not random expressions but the beginning of a giant problem for all advisors.
Our first instinct is to separate ourselves from all those rotten apples, but this assumes the general public is able to discern what makes a good advisor. Think about it. Many of us are asked by new acquaintances, relatives, and friends: “What do you do?” Because of the way the nomenclature in financial services has evolved, most in the business have a hard time answering the question succinctly. “I’m a financial planner. A financial consultant. A financial advisor. A money manager. A wealth manager.” Is there a difference? (Try telling them that you’re a custodian as I now must do, and see the curious looks you’ll get.)
In the 1960s, the mantra was “trust no one over 30,” meaning one should always question authority. Now with esteemed individuals including priests, doctors, governors, senators, and CEOs finding ways to exploit others, perhaps the new mantra should be “trust no one.” When values of everything from real estate to stocks and commodities go up in spite of economic logic to the contrary, it is easy to get sucked into the illusion of eternally rising investments. Judging from the list of victims in the Madoff affair, even financial sophisticates can fall into this trap.
Efforts to control “bad” behavior go back to ancient Babylon’s Code of Hammurabi. Criminologists and social scientists now identify possible reasons people commit crimes. Some criminals are psychopaths or sociopaths, and others are just consumed by greed, jealously, or revenge. Some people decide to commit a crime and carefully plan every detail in advance. Others start by covering up a petty theft or white lie, and wind up living a life of deceit in which they fall further and further behind. No one yet knows what demons possessed Bernie Madoff.
One of our roles as a firm that serves as an independent custodian for clients’ assets is to observe and report suspicious acts perpetrated by advisors. While there is no perfect trap for anyone intent on deception, every custodian has become wary enough to know that we must be rigorous and diligent in observing patterns and suspicious inquiries. If a person wants to commit fraud or theft, it only has to happen once to cause pain. An individual’s pedigree, academic background, or reputation is no guarantee that they aren’t working angles that could cause harm to clients.
Now amid this horrible economic crisis, every bad decision by the financial services industry may seem like a crime. Whether deliberate or the consequence of not being careful, recent events have put our entire business in a reputational hole. The burden on all of us left standing is to reclaim our industry’s position of trust.