Madoff – Madoff Sentencing – A Time to Reflect
Today we heard that Bernie Madoff was sentenced to 150 years in prison for his Ponzi scheme. He received the maximum sentence. Did anyone really expect anything less? The judge heard from many victims and they demanded the ultimate punishment. Now, everyone should move forward. The victims have to live without the resources they once thought they had. Some victims have lost their homes or are being forced to sell their homes. Some foundations and charities have greatly reduced their operations and some have even closed their doors. All this suffering because of one man’s greed.
For those who weren’t victimized by this crime, this is a good time to reflect. Apparently this can happen to anyone. Madoff’s victims included close friends and family. I’m sure you’ve heard about due diligence when selecting a financial advisor. Just before his arrest in December, Mr. Madoff probably had a very high FICO credit score, was probably current on all his bills and was a well respected money manager and former Nasdaq chairman. I have not heard of many people choosing not to invest with Madoff because of a due diligence investigation. There is one person who testified before Congress that he repeatedly tried to get the SEC to investigate Madoff’s firm with no results.
What does this mean for the average investor who doesn’t have the resources of the SEC? In my opinion, due diligence isn’t just about checking some one’s past. Yes, a felony conviction is very important even though it happened in the past. What’s even more important is the future. The best way to decide whether to consider a financial or investment advisor is to look at whether they are being held to the fiduciary standard. When an adviser has a fiduciary duty to his or her client, he or she must act in the best interests of the client even above his or her own self interests. A Certified Financial Planner professional (CFP) voluntarily accepts the fiduciary responsibility for his or her clients by choosing to be certified by the Certified Financial Planner Board of Standards, Inc. A Registered Investment Adviser (RIA) involuntarily accepts the fiduciary standard because it is required under the Advisers Act of 1940. A Registered Investment Adviser who is also a CFP certificant must meet the fiduciary standard to his or her clients under two authorities. This is a very good start to choosing an advisor.
The next question to ask is whether the RIA investment adviser representative is also a registered representative with FINRA. A registered representative licensed with FINRA only needs to meet the suitability test on the day the investment is sold. There is usually only one reason why individuals are licensed with FINRA and licensed under the Advisers Act of 1940 as Investment Advisers: Commissions. RIA firms and their investment adviser representatives may not accept brokerage commissions. Advisers are required to take their advisory fees in a fully disclosed manner. This ensures that the client knows exactly what the RIA firm will charge them before they sign the portfolio management agreement. This also ensures that the Investment Adviser does not have a financial reason to churn the client because the advisory fees aren’t based on transactions. Most advisers that are licensed both as registered representatives and investment adviser representatives do so because they would like to continue to sell and receive commissions on variable insurance products (variable annuities, variable life insurance). Independent RIA firms and their advisers (who are not FINRA licensed) can continue to work with variable insurance products that are no-load but they can’t accept any kind of compensation on those variable products. They can include the variable insurance assets under the client’s investment advisory agreement asset total for purposes of calculating the asset based fee.
We’ve also learned that bigger is not always better or safer! Take AIG, Bear Stearns, Citigroup, WashingtonMutual, Wachovia, Lehman Brothers and the list keeps growing. We’ve also learned that the age of the firm is not a reliable factor in predicting how long they will be in business in the future. The only way to alleviate (you can never really eliminate all of it) this risk is to hire an independent financial or investment advisor who has no affiliation with any one investment, insurance or banking company. The adviser should also have a qualified custodian actually custody the client’s assets. The qualified custodian should be totally independent of the financial or investment adviser. I believe the safest qualified custodian is a trust company. A trust company is not a securities broker-dealer and its only function is to custody assets for its clients. You’ll notice that I refer to financial advisors and investment advisers. This is because they are not easily interchangeable. More on this subject in another article.
After reviewing everything we’ve discussed, the final determination in choosing a financial or investment adviser should be his or her credentials, experience and rapport that the client has with the adviser right from the start. Is there chemistry between the adviser and the client? Does the client feel like the adviser is accessible? Madoff apparently did not welcome any calls or questions from other advisers or clients. This is a bad sign. Will the client be passed off to the adviser’s staff? This is usually a sign that you’ve hired an investment adviser and not a financial advisor. Would you hire the best7f0attorney in town, pay the top billing rates and then speak to a staff/team member when you had questions?
The best way to choose a financial or investment adviser is to look at his or her credentials, assess their experience, consider their independent status, consider if they are dually licensed (both with FINRA and under Advisers Act), review their recommendations and assess how well you’ll interact and communicate going forward. A client’s top priority should be to plan to reach goals not to plan to achieve a certain investment portfolio return. An investment adviser is concerned about your portfolio return as compared to the market or an index. A financial advisor is concerned about how you and your family will achieve your short-term and long-term goals as well as your portfolio returns.
Purim Thoughts: The Donkey, The Foal And The Pig
(lubavitch.com) A donkey, her foal, and a pig lived in a barnyard. The foal complained to her mother that the pig was fed generously although it did nothing all day, while she and her mother worked hard all day bearing heavy burdens yet received more moderate amounts of food, .
“Do not be jealous,” said the donkey.
“The pig is not being fed for its benefit, but in preparation for its downfall.”
Soon thereafter, the pig was slaughtered and served for the farmer’s holiday dinner.
The next day, when the farmer brought oats for the foal, the foal refused to eat.
“Foolish child. You need not be afraid to eat,” said the mother. “It is not eating that leads to destruction. It is sloth and uselessness that leads to destruction.”
The story of Purim is a story of masking and unmasking, of turning reality on its head, in which nothing is what it seems at first. The story starts with a party and an extravagant show of wealth and power in which a vain and arrogant queen loses her life and young Jewish girl is taken to the palace to serve in her place.
Through a string of events, Haman is elevated to a position of power. Yet Haman chooses to use his position to threaten the very existence of the Jewish people.
Esther now throws a party of her own in which she reveals her identity and proclaims Haman the enemy of her people. Subsequently, it is Haman who hanged on the very gallows he prepared for Mordechai the Jew, while Mordechai gains political influence which he uses to advocate for his people.
To this very day, Purim remains not just a day of celebration, but a day of sharing joy with others giving generously to the needy, sending gifts of food to friends, and joining together in a festive meal.
We Americans have long viewed our country as the land of our opportunity, and believed that honest work and hard labor will be rewarded. So the failure of our markets and the betrayal by members of the financial sector have hit us hard. We contrast the economic burdens carried by the average worker with the greedy consumption of those who have used their wealth and power to bring loss to so many.
In the face of our disillusionment, wiser voices remind us that we have no need to envy runaway profits and success&mdas1000h;for unearned wealth sows the seeds of its own destruction.
Yet neither need we respond by turning our back on the economic arena, eschewing the opportunity for productive growth. It is not wealth nor power that is evil. In the hands of a Mordechai, they are tools of leadership and the means for positive transformation.Yet in the hands of a Madoff, they are magnets for misfortune. The man that might have been the agent of good, providing billions in philanthropic aid, has instead brought ruin to himself and those who looked up to him.
This Purim, let us adopt the wisdom of the donkey and not be distracted by the naivete of her foal. It is a day to take pleasure in the gifts that G-d has given us, and to look with optimism towards the year ahead. We need not cower from opportunities to rebuild and reinvest in our future. For while wealth for the wicked serves no purpose other than to fatten pigs for the slaughter, those who joyfully carry the load of communal responsibility have nothing to fear.
Purim Same’ach. May our fortunes all rise.
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