Forty-year industry veteran Timothy F. McCarthy — former president of both Charles Schwab and the Fidelity Investment Advisor Group, as well as head of three of Asia’s largest financial services firms — lives by a golden rule: “Trust – but cut the cards!”
Even people with great reputations, he says, can commit fraud.
McCarthy, 62, speaks from firsthand experience: He did business with Bernie Madoff. But he wasn’t a victim. Initially, he was an admiring colleague of Madoff; some years later he had cause to be skeptical, if not suspicious, of him.
After eight years in Japan leading a troubled company to become the biggest Asia-based regional asset management firm, McCarthy, a California native, is living back in the U.S. and gearing up to promote his forthcoming book, “The Safe Investor: How to Make Your Money Grow in a Volatile Global Economy” (Palgrave Macmillan-Feb. 4, 2014).
As chairman and CEO of Nikko Asset Management in Tokyo, he was the first American to run a Japanese money manager, tripling Nikko’s AUM from $50 billion to more than $150 billion largely through his World Series funds program and buying up regional firms.
He came to Nikko after overhauling and transforming a troubled South Korea investment bank into an enormous success. Right before that, he started Schwab’s winning OneSource mutual fund trading program and made the discounter the go-to place for online investing.
McCarthy came to Schwab after a two-year stint in Hong Kong as CEO of the Jardine Fleming Unit Trust, following seven years as president of both the Fidelity Investment Advisor Group and its National Financial Institutional Services, where he launched a fund platform for banks and independent brokers.
Having left Nikko in 2012, the Harvard MBA is now lending his expertise as a consultant to small Silicon Valley startup companies.
ThinkAdvisor recently interviewed McCarthy, who’s based in Hillsborough, Calif., by phone. Here are the highlights:
You’ve earned a reputation for cleaning up messes and turning companies around. You must be one tough manager.
You’ve got to be pretty strong sometimes to get people to do what you want. One reporter said I had a Maoist management style: Go three or four ranks down and make those people in charge because the guys one or two ranks down won’t do it. There’s a lot of truth to that.
Are you a bit of a hatchet man?
Oh, yes. Once you move people out, it sends a signal that this is for real: if they don’t do the job, they’ll be out of one. The Japanese attitude is that it’s lifetime employment. The Western idea is: You line them up and have a big layoff day. But rather than cutting off heads at Nikko, I found people jobs so they wouldn’t be embarrassed.
In your book, you mention that in the mid-’90s, you did a considerable amount of trading with Bernie Madoff and Peter Madoff’s company. How was that experience?
Well, they were traders – any time you’re talking to a trader, you want to hang onto your wallet!
Do you now know if Bernie Madoff was committing crimes against his clients at that time?
The evidence is coming out. When he first started his fund, you could make a profit on the spread, and it was legitimate. But in the mid-’90s, those big, easy-money spread opportunities went away, and the game ended. An honest businessman says, “Okay, guys, thanks for giving me the money. I made a lot for you. It’s been great, but it no longer works. So I’m returning the money.” Bernie didn’t say “game over” and hand back the money.
Is that when he started stealing from his clients?
That’s certainly when it escalated. Some of the evidence is saying that he did it before, but the amounts would be much smaller because they’d been making money. In fact, a lot of people in the industry were wondering, “How could he still be making this much and have so much new money coming into these funds when the regulators have taken away the big profit spread? Something’s up.”
Is that what you thought?
My first inkling that something was up was in 2006, when we had calls from Japanese institutions to bring in the Madoff fund. But when we went to do the due diligence, he wouldn’t answer a lot of the questions. We couldn’t get the information. We were really worried because we knew him, and yet it wasn’t adding up.
What did you do?
I said, “Look, I don’t care if it’s my mother. If the guy isn’t answering questions and giving us the information we need, then we aren’t going to do business with him.” So we turned him down in Japan. He wouldn’t release the kind of information that any sophisticated investor would need in order to invest. And sure enough, in the last few years of his fund, there weren’t a lot of sophisticated institutions coming in anymore.
And no one was reporting him to the regulators?
I’ve not seen the data or evidence. In the early days, he attracted a lot of very sophisticated investors. It was smaller money. They would do the homework – the annual due diligence that you have to do on everybody. But after three or four years, they got comfortable: “We’ll do a cursory audit because he’s always been fine.” They got lulled into thinking that everything was OK. Also, the newer investors were a lot less sophisticated. There were very few moxie Wall Streeters that came into the fund in the last two or three years.
You were the first foreign head of a Japanese financial firm, CEO of a major Japanese fund company and the first chairman of a major Korean investment bank. How did the Asians react to having a Caucasian boss?
In Japan, the headlines read, “First Blue-Eyed.” I thought: “My eyes are hazel! I don’t know what they’re talking about!” But “blue-eyed” is slang for anybody that isn’t Korean or Japanese. It’s a little derogatory. It was quite a process for the governments and even the industry to make a decision to let a foreign group own a majority of a major financial services company and then on top of it, to have a CEO that wasn’t Korean or Japanese. So I had to be extra careful.
That must have been a delicate situation for you.
It was the most challenging part of working in Korea and Japan. When you show up at a troubled firm and there are 3,000 Koreans and then one white guy, and in Japan, 500 Japanese when I walked in the door and then me, it can be a bit intimidating. So it took a certain amount of emotional management.
Before those jobs, you were with Charles Schwab. How was working with Mr. Schwab?
What I learned from Chuck is that as CEO, you’ve got to decide what you need to focus on and make sure you hire others to take care of stuff that needs to be done right but that you don’t have to look at every day.
What was one of the chief things he focused on?
The customer experience manifesting itself in the brand. He once said to me, “Chuck wouldn’t do that!” What he meant was “Chuck” in the eyes of the investors: This is what he is, and this is what he ain’t — and we always have to be paying good attention.
What did you learn from working with the chairman of Fidelity, Ned Johnson?
It absolutely shocked me how much time he spent talking to and really understanding small investment advisors and retail investors. I could get an appointment with him to see a tiny investment advisor often on the same day’s notice. But if a CEO of [some big firm] came over, he wouldn’t be available. He really understood what motivated people at the grass-roots level.
Anything else eye-opening that you picked up from these leaders?
Though over the years, all the firms have gone after the high-net-worth-client — those with more than $5 million — two franchises that probably grabbed as much high-net-worth money were Charles Schwab and Fidelity. Yet both these head guys were trying to build a product for the man-in-the-street. If you do a good job for the average guy and one in 50 gets rich, he’ll stay.
What was your mission when you joined Schwab?