When the trust is gone...

Bernard Madoff led the ultimate deception to cap off what could be the rockiest three month wallop to investor confidence in 80 years.

This pillar of the financial and philanthropic community has ravaged so many unsuspecting clients. Some are among the "who's who" of the rich and powerful. Others are ordinary working people who lost portfolios encompassing their entire hard worked life savings. And sadly, a few are charities who may have to shutter their doors now. While all the details have yet to emerge, one thing is clear. This man may go down in history as the most talented huckster to ever hit Wall Street.

I know a hedge fund manager who was duped by Madoff. He now counts himself among the millions of walking wounded who have been pulverized for one reason or another during this three month stretch. I finally spoke to him yesterday. His sobering comment to me was, "Ed, everyone had the ultimate faith in this salt of the earth man. I would have believed that the Pope would have scammed us before Madoff. Who can we trust now?"

And that's the $64,000 question, isn't it.

Two things are givens. Americans have short memories. And, they tend to be very resilient (probably in part because they do their best to forget those negatives.) But, in the near term, none of this really helps.

The trust is gone. I've heard one typically positive retiree (who lost 40 percent of his savings to the general market plummet) tell me that he is in utter shock. He's glad that he'll never be forced again to deal with our investment cycle. And, he’d never want to be standing in "my shoes" again (he meant 40 years old) because the system just isn't fair. He has lost heart and all faith.

Financial services firms continue to advertise, telling the world they can be trusted. Media consistently churn out articles such as the "5 or 10 steps" people need to take to make money now or retire with security. And, brokers are attempting to regain their composure by confidently telling clients what sectors they need to have their money in because "it will rise again."

But, most people are past the point of listening because almost no one, in any position, is believable today.

So, how can this trust be rebuilt? Well, the obvious answer is that it will take the resurgence of a positive economy (and stock market.) Once that happens, those short memories will fade further as investors are barraged with advice, marketing and sales pitches on how they can once again prosper. Good times breed confidence and the belief in more opportunity.

But until that happens, individual investors need straight, transparent communications from those would be advisors who might normally shy away from these most difficult topics. In some ways, there is no such thing as providing too much disclosure on facts or communications about issues that do (or don't exist) in this tumultuous period. There's an extremely large dose of paranoia running wild right now. Based on the Madoff crisis, that isn't all bad. Advisors who were once "trusted," need to anticipate doubts and open up their world to be believed (all over again) or they may find that many of their clients will terminate accounts and stash their savings in the only place that feels safe right now. Under the mattress.

Comments

[Steve]

Straight and transparent communications will help. Alot.

But it's also the responsibility of the receipient of the communication to exercise prudent skepticism. The old saying "if it sounds too good to be true, it probably is" has a great deal of validity. There has been a great deal of coverage about how the consistency of Madoff's alleged returns was simply not credible--it went against normal market behavior, common sense, and statistics. Especially so when combined with his failure to provide basic disclosure as to his strategy or transactions.

If someone says, "Don't ask me how, but if you trust me with your money, I can guarantee you 10%+ per year, no matter what the market is doing"--which is essentially what Madoff said--you should run, not walk, the other way.

[ed]

I guess you have a point about Madoff, Steve.

But, how about the hundreds of other Hedge Fund managers who used to push out incredible returns and made sure that their recipe for success stayed secret? No one knew how they did it...just a lot of trust went into it.

My point is that it just isn't always that easy to know.