Madoff made off with their loot, while investors snoozed
The Bernie Madoff scandal was a strong undercurrent that surfaced during the 2009 Bluegrass Business Summit on Thursday.
How can investors avoid being ripped off by the likes of Madoff?
A titan among Wall Street investment fund managers, Madoff has confessed to running a Ponzi scheme that may have clipped his clients for $50 billion over the years.
Madoff “stands as an example of how the financial services industry has failed to protect the best interests of consumers,” says D. Scott Neal, a financial advisor with offices in Lexington and Louisville.
“It highlights the increased need for consumers to proceed cautiously when working with an adviser,” Neal said in a statement shortly before the Summit began.
He recommends getting “to know an adviser and gauge his or her commitment to placing clients’ interests first.”
On a more practical level, Neal says investors should know how their adviser gets paid (usually fees or commissions) and “you should always know where your money and securities are actually held.”
Neal says “most reputable advisers will use an unaffiliated custodian (say, E*Trade or Charles Schwab) for the safe keeping of your assets. This simple check and balance could have saved the Madoff investors millions by bringing the problem to the forefront earlier.”
During the Summit, a panel of bankers and investment advisers briefly took up the issue.
Laura Boison, a former banker who now works for the E.S. Barr investment firm in Lexington, said a big problem was that Madoff controlled all aspects of his firm’s business.
There were no “dual-controls,” she said, echoing Neal. “You have to have crosschecks” — internal and hopefully by independent outsiders.
Madoff was trusted because he was a sophisticated, debonair Wall Street insider who was believed to have a long history of producing above-average returns for his clients. His record was falsified and his clients didn’t catch on before he confessed.
Bo Henry, president of Republic Bank & Trust Co. in Central Kentucky, said investors became “rate conscious” and were blinded by the growth in their investments as falsely reported by Madoff.
They chose Madoff instead of an honest adviser. “The good institutions may not always pay the highest rates,” Henry said.
Bill James, president of First Federal Bank in Lexington, said greed blinded the Madoff investors — just as it did the mortgage lenders who made the loans customers couldn’t pay back that helped trigger the current recession.
“Risk and reward go hand-in-hand,” James said. “Everybody just got a little bit too greedy.”
And, Boison reminded the audience, “It’s our responsibility to use good sense. If it appears too good to be true, it probably is.”
