Crash course for 2009: How to vet a money manager
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The Bernie Madoff scandal makes a mockery of the concept of ‘due diligence’ -- the idea that investors, or their agents, are supposed to properly investigate a money manager before handing him millions of dollars.
Barry Ritholtz isn’t surprised. The Wall Street veteran and financial blogger contends that the investment industry long has spent little on vetting the managers to whom it funnels clients’ money.
‘The asset management and brokerage industry is vastly under-invested in due diligence; the resources applied to hedge funds and managers is a comparative pittance,’ Ritholtz writes in this post on his blog, The Big Picture.
Madoff was something of a special case in that he personally cultivated many of his investors, rather than rely on brokers and financial advisors to bring them in. He also had a reputation for slamming down anyone who asked too many questions (which, of course, should have been a good clue that something was wrong).
Still, to hear Ritholtz tell it, it’s surprising that more well-heeled investors don’t end up in the clutches of scammers:
Note that every major brokerage firm -- from Merrill Lynch to UBS to Morgan Stanley to Credit Suisse and beyond -- offers a platform to [money] managers. Their managed assets group, private wealth management, even retail brokerage have access to these funds and managers. And the due diligence that’s performed? It would be generous to call it weak. I was vetted a few years ago, and the items I was prepared to answer questions about -- an IRS stock option issue (now resolved), a bankruptcy (someone with a similar name, not me), a few dumb items on my credit score -- never came up. I was stunned how superficial the process was.
Maybe it takes a catastrophic market year like this one to wake everyone up -- although, of course, it’s too late once a big chunk of money is gone, whether illegally (in a Ponzi scheme) or legally (because of a manager’s disastrous investment picks).
As one commenter notes on Ritholtz’s blog:
This lack of due diligence extends beyond the ‘professional’ money managers -- how many individuals do even the simplest things when deciding what funds to put their IRA or 401-K money into? How many actually check to see what the fees are, the fund manager’s tenure, how well the fund has done in down markets vs up markets, or for that matter, how many use performance as a metric at all?
-- Tom Petruno