On January 27, Financial Advisor co-hosted a Webinar entitled Building Trust in the Age of Madoff: 10 Ways To Answer the Question, "How Do I Know You Or Your Money Managers Aren't Stealing y Money?"

There was room for only 1,000 participants, and the event was quickly booked solid, so we knew we had
hit a nerve.

So, how do you answer that question? Of all the things that could sour people's trust in their financial advisors, the Madoff scandal could likely have been one of the biggest. At the end of the day, your clients don't really believe that you could have or should have known when the markets were going down. They don't expect you to know when to get them out, how to time the bottom or when to get them back in. Even if they were looking to vent their frustration on a scapegoat and fired you, deep down most of them knew that you couldn't ever have really predicted what the markets would do.

When somebody steals from them, on the other hand, that's another matter entirely. This is something you do have control over, because it's your fiduciary responsibility to place their money with a manager who won't steal it.
James Hedges IV of LJH Global Investments said Madoff's money management proposition shouldn't have passed an institutional-quality due diligence test, "because when you get to page two of your 30-page due diligence questionnaire," says Hedges, "you've already tripped eight alarms and said 'I'm out of here.'"

Christine Williamson wrote in the Pensions & Investments newspaper, "Most major U.S. institutionally oriented hedge funds didn't have anything to say-they had passed on Mr. Madoff's funds because he wouldn't provide enough transparency on the investment process."

One thing you can do to assuage your clients' fears about the money managers you pick is explain your thorough and effective due diligence process. And if you didn't have one that was thorough a few months ago, you better have one now.

Your assurance to the client should sound something like this:
"You can be sure that your money will never be in the hands of someone who can steal it because we have a 15-step process for screening money managers. Madoff would not have gotten past step four. Would you like me to show you every step in the process and how it works?"

Maybe the advisors at most risk right now are those who still put together their own portfolios and do the securities selection. You know you're honest, but would you pass an institutional-level due diligence process? Food for thought.

Where does one find a process like this? I Googled "institutional money manager due diligence" and found many sources of valuable information that can help you get it done. Many funds-of-funds boast about their process. Ask to see them. If I were still an advisor, I would ask the most respected money managers I worked with to tell me exactly what they would do to screen a money manager if they were on the other side of the table as an investor.

Financial advisor Mark Little has a peer review process that makes it almost impossible for him to become ensnared in the kind of money management Madoff was offering. Here's how he would explain it to a client, "As you know, we have a team of independent subject matter experts who provide a multiple layer peer review in the creation and implementation of your financial plan and every element of that plan, including the investments. We identified these professionals as the best-in-class CFPs, CPAs, lawyers, money managers and insurance experts to create and implement your plan so you have the highest probability of achieving your goals. They don't just work with us. They have their own separate businesses, clientele, relationships with other financial advisors and transparent processes, and they are accountable to each of their own industry's regulations. The probability of all of these individually vetted and independently credentialed professionals being willing to risk their professional careers and personal freedom to conspire in a scheme like this is almost impossible. Ponzi schemes are predictably masterminded and executed by one person who has eliminated all the usual checks and balances, as was the case with Bernie Madoff. What other questions do you have so I can help you be confident that we're looking out for you and so you don't have to worry that someone is stealing your money?"

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