Hollywood is at it again. It seems the financial services industry is a favorite topic for Hollywood writers who discuss the spectacular failures of trust that have occurred in the industry. While these failures certainly make for good movies and television, there are many in the industry who provide a tremendous benefit to their clients and their families. However, Hollywood does do a service in trying to educate individuals on their need to understand how their advisors are generating portfolio returns for their clients.
Recently the ABC network had a two-part series called “Madoff” starring Richard Dreyfus. The miniseries dealt with Bernie Madoff who ran a giant Ponzi scheme that defrauded more than 4,800 investors. The series did a good job of illustrating how he manipulated many people’s trust and showed an already distrustful public that investing with the wrong financial advisor can ruin lives.
For me two issues stood out: one was the incredible naïveté of the so-called hedge fund experts who invested their clients’ money with Madoff. The so-called “experts” were unable to understand any more than their clients that what Madoff claimed to be doing year-after-year was against any basic understanding of finance.
Essentially, he was selling his ability to get stock returns while only taking cash-like risk.
The second issue was how the series highlighted the major flaw for investors in the Madoff investments. Madoff had employees on a separate floor from his trading activity creating fake client statements showing trading activity that never occurred. For a financial advisor to establish such a vast operation to defraud their investors is an extreme act and highly unlikely.
But more importantly, most financial advisors – like we do here at Crimmins Wealth Management – use a third-party custodian who creates client statements independent of the advisor. This permits assurance that the client statements accurately correspond to the transaction activity in the account.
Another television series on Showtime called “Billions” highlights fraudulent behavior. This fictional series features Damian Lewis portraying a wealthy corrupt hedge fund manager – Bobby Axelrod. It shows the Securities Exchange Commission (SEC) working behind the scenes to take down the hedge fund and its leader for what is believed to be illegal insider trading and all the twists and turns associated with the rich and powerful.
Once again you have a hedge fund firm who defies conventional understanding of finance by consistently generating significant stock returns through individual stock selection. In this case, the company stock price often abruptly changes when “new” information reaches the public. The show highlights how Axelrod and his traders have illegally developed the ability to acquire insider information on companies which allows his firm to purchase or sell securities ahead of the the market. This allows him to take significant bets and earn significant returns.
While I am not naïve enough to believe that this does not occur occasionally, the ability for the government regulators to track purchases and sales of securities allows the government a tremendous capability to monitor and take regulatory action against people not playing by the rules.
For investors, the best advice is to work with a financial advisor who is a fiduciary (a financial advisor who puts the client’s needs before their own) as opposed to a broker who use the “suitability standard” and are merely required to ensure an investment is suitable for a client at the time of the investment. This differs from the “fiduciary standard” where registered investment advisors (RIAs) must avoid conflicts of interest and operate with full transparency. A recent ruling by the DOL (Dept. of Labor) will require all retirement accounts to be managed to the fidiciary standard starting next year.
The media may highlight the worst of the industry for entertainment purposes. But highlighting these issues can be beneficial for the investor. Make sure that your investments are professionally managed by a fidiciary for your benefit.
If you enjoyed this article, CLICK HERE to subscribe to free updates from “Roots of Wealth”.