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MAKING CENTS OUT OF THE NEWS
Blog #10
(March 11th, 2010)
UPDATES AND AFTERTHOUGHTS
By Tom McAllister, CFP®
In the spirit of this season of devotion to detail (this is a time for filling out tax forms and cleaning out closets), I’ve decided it’s time for tying up loose threads. I’m devoting this blog post, therefore, to updates and afterthoughts.
For starters, an update on one of the scoundrels about whom I’d been blogging: Arthur Nadel, 77, residing in the New York City’s Manhattan Metropolitan Correctional Institution, pleaded guilty last week to a variety of securities fraud charges relating to the four hedge funds he used to run from his offices in Sarasota, Florida. Nadel admitted defrauding investors out of almost $200,000,000 in a Ponzi scheme over a period of ten years. When the “pyramid” collapsed in January, 2009, less than $1,000,000 remained in all the funds combined. Nadel awaits sentencing in June. While a court-appointed receiver has been recovering as much of the stolen money as possible, it would appear investors can expect only pennies on the dollar. Several associates in the scheme have not yet been charged; observers expect Nadel to cooperate in the case again those associates in return for a “more favorable” prison setting, where he can expect to spend the rest of his life
A second scoundrel featured in earlier blog posts is Marcus Schrenker, the pilot parachutist (the one who allowed his beautiful single-engine jet airplane to crash last winter in a Florida Panhandle swamp. Schrenker, like Nadel, is in prison, in his case serving a four-year federal jail sentence right in my own neighborhood in Hamilton County, Indiana. Shrenker awaits trial on a multitude of securities fraud cases filed by the state of Indiana. Already found guilty of “twisting” in his insurance sales activities (inappropriate switching of clients from one policy to another for the sole purpose of generating new commission income), Shrenker, unlike Nadel, continues to maintain he is innocent of securities fraud, despite $10,000,000 being in question due to his activities.
The “King” of Ponzi scams, Bernard Madoff, following a guilty plea, is serving a 150 year sentence in Federal prison (or as much of that time as a 76-year old is likely to last). Several Madoff associates, including his CPA auditor, are still being investigated.
It would appear that crime pays – but only for a while. Ponzi schemes, by their very nature, must collapse under their own weight… Investors can protect themselves in several ways. (I’ve mentioned these before, but let me repeat myself)….
Rule #1: If it sounds too good to be true, it probably is! Stock market returns are never guaranteed, nor are they consistent from year to year.
Rule #2: Your managed account should always be held at an independent custodian or trust department. The investment manager should not have access to your funds, except to the extent of quarterly management fees you have agreed to pay. You should be able to view your total account on line at any time of day or night.
Rule #3: Your money manager must be regulated, either by the Securities and Exchange Commission, or by a state securities regulator. Copies of the manager’s income statements must be available.
Rule #4: You must exercise due diligence when selecting a money manager. This means checking out each manager’s regulatory record, their references (professional advisors who’ve used their services and/or the broker/dealers who handle their trades. (Madoff listed no other brokers with whom his funds did business.)
The last “loose thread” for this week’s blog post consists of some afterthoughts on Blog #8-10 in which I discussed “fiduciary” versus “suitable” relationships. Several readers, both clients and money managers, have challenged my explanation of the distinction as having been less than “crystal clear”.. Here goes…
A fiduciary must always put the interests of his/her customer ahead of his/her own interests. By contrast, an advisor operating according to the suitability standard can, and often does, put his/her own interests first, still offering an investment which is “suitable” given the goals, objectives, and circumstances of the client.
For example, a given mutual fund may indeed be ‘suitable” for a client. However, if the advisor is being compensated for using the particular fund in an account he/she is managing for a fee, and fails to disclose that extra compensation to the client, that transaction has failed to meet the fiduciary standard even while satisfying the suitability standard. (I hope this puts the standards topic to rest – all this spring blog cleaning has me exhausted!)
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