Due diligence? Get serious (Part I)

The sub-prime mess: As you well know, mortgage brokers and lenders failed to do their due diligence on borrowers who wanted big mortgages with little or no assets. Because people up and down this chain failed to do their homework–or deliberately gamed the system–Wall Street collapsed and the U.S. entered a serious recession.

The Madoff mess: Not only did major individual investors and charities get trapped in Madoff’s $50 billion Ponzi scheme, so did major financial institutions. But surely a little bit of old-fashioned due diligence could have pierced the veil. Given all of the criminal and unethical conduct we’ve seen of late, you must subject all of your carriers and marketing firms to a much higher level of scrutiny. Here are a few practical suggestions:

1. Become your own due diligence officer. Don’t outsource this key function. Read the fine print yourself. If you don’t like what you see, don’t do business!
2. Don’t place too much weight on any one financial rating agency. Rather, weigh the preponderance of data from multiple sources.
3. Don’t give unearned trust to anyone or anything. Make sure that the products you sell have established track records–and that your carriers and marketing firms have the means to stand behind their promises.

Finally, a prediction. If 2008 was the year of financial calamity, 2009 will be the year of due diligence. In part 2 of this column, I’ll discuss what this trend means for you and your clients.