Advising clients in the wake of Madoff revelations
Consider comments made to MarketWatch columnist Chuck Jaffe: "I've worked with my adviser for years," said Ted L., a 60-something executive in Short Hills, N.J. "He came highly recommended and has always seemed to do a good job – so good that I've maybe taken his success for granted. He's been pretty good even when everyone else is doing so bad, so now I am worried that maybe he's doing something wrong or that this is all fake. How do I know?"
Investors want to know what makes their wealth management advisers different from Madoff, the mastermind of an alleged $50 billion Ponzi scheme. They are likely to ask tougher questions of their advisers in the scandal's wake, as they should. Choosing an adviser should be done only after rigorous checks are done.
MarketWatch reported: "The lesson people need to learn today is 'Trust, but verify,'" said Ken Springer, who runs Corporate Resolutions, a New York firm that does background checks and investigations for institutional investors. "If you don't know how someone else did a background check, you don't trust what they did and do the work yourself. And if you can't see enough information to get that warm and fuzzy feeling, you keep looking and put your money elsewhere."
CPAs in wealth management practices can stress independence. Any adviser worth his or her salt would advise clients to avoid those who make unverified claims, pressure you to reinvest without taking profits, require you to write checks to the adviser's firm rather than an independent custodian, and suggest your money be overly concentrated in any one investment - mistakes some of Madoff's clients made.
The Wall Street Journal suggested the scandal may increase appreciation for mutual funds. Most have diversified portfolios of widely traded securities, with fund assets held by independent custodians. "Mutual funds should do well because this...scandal highlights the advantage of investing in a mutual fund with a set of default rules and protections that would make something like this extraordinarily unlikely," says Mercer Bullard, a professor at the University of Mississippi School of Law and founder of Fund Democracy, a nonprofit advocacy group for mutual-fund shareholders and their advisers.
Victims of Madoff have a long road ahead of them. Attorney Jan Douglas Atlas wrote in the Miami Herald that they will need to talk with tax professionals about deductions available for investment losses. The tax issues will be complicated, and Atlas writes that, "Many professionals believe waiting for the IRS to develop more information may yield the best advice and results."