Bernie Madoff died at 82 years old, a dozen years after his scandal rocked the financial services … [+]
Bernie Madoff died today at age 82, over a dozen years after he was arrested by federal authorities in what would be uncovered as the largest Ponzi scheme in history. While the main victims were those who entrusted him with their investments, the collateral damage extended far and wide. For the financial services industry, the perception of widespread malfeasance and dishonesty was hard to shake, especially with the nearly simultaneous mortgage crisis and recession.
Rob Clarfeld founded his eponymous advisory firm, Clarfeld Financial Advisors, in 1981 after coming up in the accounting world at what would become Ernst & Young and KPMG. As the Tarrytown, New York-based firm grew to more than $5 billion in assets under management, his reputation and client relationships strengthened.
However, in the aftermath of Madoff, many current and potential clients displayed a newfound weariness.
“This caught people by surprise. There were clients and people who knew me for a long time, who would say ‘You’re a small shop and we’re trusting you with all our money so how do we know that you’re legitimate?’” Clarfeld, 69, recounts. “I doubt JPMorgan
He wasn’t offended by this reaction. On the contrary, he understood it and tried not to take it personally. Clarfeld would explain to clients that, unlike Madoff, his firm uses separate custodians and portfolio managers as a safeguard.
For David Bahnsen, whose Hightower-backed namesake firm The Bahnsen Group manages $2.1 billion in Newport Beach, says that as an advisor at the time the distinctions between their structure and the one employed by Madoff was easy to point out. That included the separation of management and custodianship cited by Clarfeld.
“This was amidst the financial crisis and other Wall Street blow ups so it was not just about Bernie. People wondered why Merrill Lynch and Morgan Stanley had bought 40 gazillion dollars of toxic mortgage bonds,” Bahnsen, 46, says. “Their confidence in Wall Street as a whole had been hit.”
While the Madoff fraud was notable, Bahnsen says it was eclipsed by the financial crisis that unfolded contemporaneously and left a far larger footprint.
“If we’re being objective, the mortgage crisis affected everybody while Madoff didn’t affect anybody economically other than the specific people that invested with him,” he adds.
Being located in a suburb of New York City and having personal and professional connections with the Jewish community made the cautionary tale resonant for Clarfeld.
Among the many unfortunate elements of what happened, he laments, was the fact that Madoff reinforced so many stereotypes that fuel anti-Semitism.
“We all read the financial press and occasionally someone you’ve never heard of somewhere else would end up in a couple million dollar scam,” he says. “This was a guy that everyone heard of and knew. There is no one in my world who doesn’t know somebody who was hurt. It rocked New York and Palm Beach.”
Madoff built his book of business through community-based word of mouth, something that Bahnsen says is integral to financial services and unlikely to change.
“It’s embedded in human nature, the average person is going to go off recommendations from the people they know and trust, play golf with and have coffee with,” he says. “Well, that better be a pretty good golf buddy.”
Paul Pagnato, who founded and serves as co-CEO of $2.3 billion Reston, Virginia-based PagnatoKarp Cresset, hopes that industry leaders, advisors and regulators will learn from mistakes made in the Madoff case. Unfortunately, he sees several underlying issues that enabled Madoff and persist uncorrected to this day.
He highlights the ability for advisors to create their own client statements and to serve as advisor and portfolio manager, the lack of requirements to show any transactions or holdings in client portfolios, the ability to charge commissions, and a lack of Securities and Exchange Commission transparency standards as issues that enabled Madoff and persist uncorrected to this day.
He cited the recent fire sale linked to Archegos Capital Management as an example that firms can still operate in the shadows with little oversight and create risks for investors. “I’m sure there are common denominators,” he says.
His firm was once referred to Madoff and looked into investing with him but decided against it because of a lack of transparency, a fateful decision he still thinks about.
Clarfeld expects this news cycle to dissipate sooner rather than later, much like after the original events comparing it to the insurrection at the U.S. Capitol on Jan. 6 that, in his view, is discussed less and less.
“I saw the news this morning. It flashed up on my computer while I was on a conference call and it felt like the end of an era. For a while he so defined investing but eventually there was a further definition,” he adds. “There was a lot of suspicion at the time that now has faded away. If you’re talking about the perception of the industry as a whole, over time it just became a story. Now it will come up one last time because of his passing.”
