Ripple Effect From Madoff-Stanford Era May Touch Advisors As Well As Clients

Thursday, March 08, 2012 10:16
Ripple Effect From Madoff-Stanford Era May Touch Advisors As Well As Clients

Tags: Advisor businesses | business strategy | fraud | independent broker-dealers


Paying for one’s sins usually means justice has been served and the event can be put behind us. Wednesday’s picture of Allen Stanford being led away in handcuffs may have fueled such feelings of satisfaction. But the storied effects of Madoff, Stanford, and their ilk are not over. There’s a trickle-down effect which is just beginning—one which will pervade not only client risk management strategies, but will also subject industry advisors to recompense.

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As Congress works to compensate the victims of these schemes, it is turning to the SIPC for additional resources. Advisors at large firms already pay a small percentage to fund the insurance the SIPC provides. But the agency’s ability to cover such losses is limited. The extent of the damage exceeds SIPC funds. So where is Congress turning to cover the deficit? Certainly not through the kind of bailout program provided failing banks during the crisis.
Like it or not, new legislation before the Congressional powers is heavily weighted toward viewing RIAs as a next-in-line source. Advisors may have to begin insuring themselves in addition to whatever coverage their firms provide.
Then there’s the client’s side of the picture. With the disappointing returns in traditional markets over the past few years, investors began housing higher returning alternative assets within the tax-deferred haven of their IRAs. IRAs can house partnerships, private REITs, privately held stock, and even operating companies. And each of these alternative types of assets can become havens for illicit dealings. Firms which previously welcomed such assets are now imposing tighter restrictions or sending them elsewhere. Clients may face higher custody fees as specialty firms become the only place of refuge.
Coupled with the added costs which advisors may have to charge to cover added insurance, investors may experience a different type of double-sided cost squeeze. Many advisors are already increasing their management fees as the economy begins to bounce back.
All of this increases the challenge to deliver added value. RIAs typically have been the source for flexibility of service and more customized options for investors. The attraction for entrepreneurial advisors wishing to offer more customized service may be dimming as a result.
Another way to view it is as an opportunity for growth. Sometimes the bigger the challenge, the more difficult it is to see the opportunity. What opportunities do you see as you think about the challenges caused by Madoff, Stanford, new regulatory edicts, and the possibility of mandated fiduciary status?
The hope in asking these questions is to begin a thought process which could open a long and productive discussion. Reinventing an industry is a bit more difficult than reinventing your business. The latter is a choice; the former is not. One by one, there is an opportunity for advisors to make the industry better. In the process, we can find new ways to deliver services that enable investors as well as advisors to meet and beat the challenges before us.


Comments (2)

Thanks Lisa. The Madoff/Stanford frauds were enabled by lax due diligence. Even Madoff said "they had to know" in his jail cell interview last year. He can't believe that laziness was the reality.

The industry does need to change, & as you say it will happen one advisor at a time, with a competitive edge accruing to first movers. Manager due diligence, such as it is, is fungible -- it's all pretty bad.
ronsurz , March 08, 2012
Hi, Ron - Good to hear from you. The point you make about the competitive edge is a great one. First takers will definitely come out ahead on this one. As I said in yesterday's post, hitting the topic head on before it's mandated can speak volumes to clients about trust and quality of service.
lisagray , March 08, 2012

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