Asset Protection

What’s Changed Since Madoff: Are You Protected?

It has been almost ten years since Bernie Madoff’s Ponzi scheme was discovered, with a total fraud estimated at $64.8 billion. He defrauded hundreds of investors, including many otherwise sophisticated individuals like Fred Wilpon, the majority owner of the New York Mets. Madoff is currently serving what will effectively be a life sentence in prison. Around that same time, there were several other advisors engaged in similar scams who were caught and prosecuted.

Problem solved, right? The bad actors have been put away and everyone’s investments are safe and protected.

Well, not really. Almost nothing has changed since then.

Many of the things Madoff did then are still legal today: holding client money, pricing securities, manufacturing products, and creating performance returns.

While the likelihood of a major fraud of Madoff-like proportions may have been reduced, that doesn’t mean that millions of Americans’ hard-earned and relied-upon savings are fully protected. The little secret of the wealth management industry that persists is that your advisor does not necessarily have to put your interests first. And that leads to “loopholes” and conflicts of interest on so many levels.

For most advisors, the applicable standard of care is called “suitability,” which means that the investments and advice that they provide must generally meet your needs. They need not work to provide the best possible advice, nor must they disclose conflicts of interest or fees that they are receiving for making a recommendation. This is the status quo not just for individual advisors, but for legions of “brand name” large firms who exist in this space.

The Fiduciary Rule was set to be put in place by the United States Department of Labor, requiring, among other things, that advisors act in the best interests of their clients rather than under the less stringent standard of “suitability.” It is unclear whether or not the rule will come to fruition but it doesn’t eliminate the need for fiduciary principles.

“Yes. We offer fiduciary services,” is not a proper answer to whether your advisor is legally a fiduciary.

Nor is, “Of course I put your interests first.”

Those statements don’t fully uncover whether or not your advisor is a fiduciary, and if there’s ever a dispute about your investments – and we truly hope that there’s not — the disagreement could end up in arbitration. Having observed the industry for decades, we can tell you what the opening line of defense in this type of case would be: “We would like to make clear that the advisor is NOT a fiduciary.”

The arguments coming from proponents of the non-fiduciary status quo are that they won’t be able to make a living if their fees, commissions, and soft dollar arrangements are taken away. They argue – with a straight face – that the addition of a “best interests” requirement will not allow them access to certain opportunities that are, in fact, in the best interests of their clients. Let’s be honest — it’s possible to make a very healthy living in this industry while serving clients’ needs honestly, transparently, and free of compromise.

There is effectively a grass roots campaign among consumers and like-minded investment professionals to put client interests first with a standard of safety and transparency. Accordingly, we created True Fiduciary™ Standards to make this a reality and a basis for advisor accreditation that will truly benefit clients of every investment level. Our goal is to positively impact the lives of one million people with True Fiduciary™ Standards.

Our advice to anyone looking to get sound and non-conflicted financial advice is to ask their advisor if they follow these True Fiduciary™ Standards:

  1. Embrace the legal fiduciary obligation to place clients’ interests first.
  2. Deliver comprehensive financial planning.
  3. Provide fee-only advice.
  4. Do not accept commissions.
  5. Receive only one source of revenue: client fees.
  6. Provide transparency on portfolios and investments.
  7. Remain independent from any bank, broker dealer, insurance, or custodian.
  8. Measure client performance returns using independent third parties.
  9. Do not create products to sell or price any public securities.
  10. Do Not Hold Any Client Assets, Securities, or Money.

Bernie Madoff is now paying for his transgressions, and unfortunately many of his victims are too. But just because the obvious perpetrators have been taken care of, doesn’t mean that there aren’t wolves in sheep’s clothing. Even if the Fiduciary Rule is never implemented by Federal regulators, that doesn’t mean it can’t become a de facto standard for our industry. It is incumbent upon those who could be impacted by its scope to take charge and make it a constructive reality. As such, the True Fiduciary™ Standard is already on its way to making it safer to be an investor.

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At PagnatoKarp, our focus is on YOU. We go far beyond wealth management to elevate your lifestyle so you have more time to spend on what matters to you most.

We offer digitally integrated, in-house services for investment, planning, tax, legal, private banking, family governance, concierge, and travel. With True Fiduciary™ Standards and Family Office services, you receive transparent advice focused on safety of assets, simplicity, and cost.

To discuss YOUR needs, please call 703-468-2700 or send us a private email.

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