The Message:
Revisiting Madoff
Last month we discussed how regulation, specifically on our country's banks, can cripple an economy. This month let's talk about how regulation, if well crafted and used for the right reasons, might actually do some good...may be.
This time last year we welcomed in a new presidency and congress who promised to find scapegoats for the financial crisis in the fall of 2008. The media jumped on board and made their "poster child" Bernie Madoff. Rightfully so, since he deceived the SEC regulators for over 20 years and artfully embezzled billions of dollars. Even more shocking was his deception of over stated returns and his lofty client list! Poor Bernie, everybody hates him.
Let's look at what really happened and what we can intellectually learn from this story. What can be garnered from the investors perspective that lost millions. What can we learn going forward?
First and foremost there was greed. I'm not talking about Madoff's greed, but his investors. How could some of this country's most wealthy investors have a major portion of their assets with him? It just does not make sense. It has been said that a billionaire family whose name is on the title of one of Wall Streets biggest firms, had over 40% of their family assets with Bernie Madoff? What? I'm sorry but that begs lots of obvious questions:
Had this family never heard of asset allocation or diversification? Did they not send their firm's attorneys and compliance heads to check out Modifies firm? Were they just picking guys on their own to manage assets vs. employing professionals who do this for a living?
Amazing and shocking. Only one word can explain this and that is greed. Greed overshadows all reason when it comes to money.
Let's think about how this happened. These prominent families relied on each other to network to top advisors since they are busy living a wealthy life. Bernie was the talk of the town with his remarkable, albeit fraudulent, returns during the past decade. So fueled by greed, they all jumped on board expecting better rates of return than the average person, . The result, a 10 year average on their investment portfolio that was less than that of a bank savings account and in some cases even worse! Greed lost them a major portion of their nest egg...Greed made them blind.
So what can we learn before Bernie becomes a faded memory? Be prepared, history will repeat itself . Greed is not going away anytime soon.
Where does that leave us today? Cedrus clients avoided the pitfalls of Madoff and others by employing methods and processes that do not allow greed to overcome their portfolio as it did for so many of Americas most prominent families.
Unfortunately, they chose to put their trust in unbelievable returns. This is the very reason we have put our trust in our esteemed portfolio management outsourcing partner SEI for the past 13 Years.
The most important value in this lesson is TRANSPARENCY.
See in this newsletter a communique' we got from SEI last year announcing that all their client's portfolios had no exposure to Madoff. This was terrific and welcomed news but let's look at WHY there was no exposure. The simple truth is that in utilizing SEI you have made the prudent decision to pay for a gatekeeper to your portfolios asset allocation and the managers chosen to fulfill that promise... SEI of course was reported Madoff's returns and considered his firm for an appropriate portion of these assets. But their rigorous due diligence found that they simply could not hire Madoff since he would not be transparent and disclose how and where he invested the funds. Pretty simple concept, SEI could not provide oversight if they could not see how the funds being managed were being deployed. In fact SEI had clients who did not agree with their findings chose to ignore transparency, and we can only imagine the consequences.
This past financial crisis was the worst I have seen in my 25 years in this business due to the loss of credibility of some of Wall Street biggest names. It is my opinion, that it does not matter if it was over leveraging, credit default swaps, overvalued real estate prices, mortgage defaults, or whatever. All the misgivings can be traced back to financial selfishness and the lack of transparency to keep greed in check. I for one welcome any new regulation that forces transparency, not only on Wall Street, but in the corporate world as well as in our government. We remain proud of our association with SEI to be a leader in fighting this cancer in the business world. You should too. Often when markets start to accelerate upward, SEI takes flack for moderate returns. SEI more than makes up for it when the truth prevails and all the greed and deception come unwound.
Cedrus knows the importance of transparency. If you have not already checked out our new website, please do so at www.Cedrusfinancial.com, click on the Transparency & Accountability of Advisors and read more about where we stand on this issue. It is one of the primary keys to your contentment. That is exactly why we founded Cedrus and what makes us different. We also expect transparency in working with other advisors in your family such as lawyers, accountants, estate planners, etc. all to the benefit of your family for the reasons we have outlined in this article. Know that his will always remain foundational to us and we hope you feel the same. Cedrus is working hard to protect your families wealth. Good lessons learned indeed.
Further to this discussion please us the link in this newsletter
"SEI Managing the Managers."
More to come, next month
John A. Scott
President
Cedrus
SEI Funds Have No Investments
With Madoff
Commentary December 17, 2008
The Bernard L. Madoff hedge fund scandal continues to make news. We expect this to continue as major financial institutions and prominent investors attempt to discover the extent of their losses as a result of the collapse of Madoff investment firm. SEI funds have no investments with Madoff firm, and have no direct exposure to any investments managed by his organization.
Our View
While SEI has no investments with Madoff firm, any negative news casts a shadow over the entire industry. As a result, it is likely that the industry is moving toward tighter regulatory oversight. SEI welcomes this development, as transparency has always been a high priority in SEI's due diligence and risk monitoring processes. As such, SEI policy requires position-level transparency from our hedge fund managers and would embrace regulation or oversight that mandates a similar requirement from the entire industry.
By: SEI Investment Management Unit
CLICK HERE TO READ: SEI Managing the Managers Article
Having trouble? Copy and paste this link into your
browser window:
http://www.cedrusfinancial.com/pdfs/SEIManagingTheManagers.pdf
In Closing
After months of waiting, online statements through SEI are finally here. Not only are restatements more environmentally friendly, but they also allow you to receive your investment information up to one week faster.
Here's how you sign up:
New users of PortfolioAccess:
- Visit www.portfolioaccess.com and select "Sign Up to View Your Account Online."
- Read and agree to the website's Terms of Use
- Enter Personal Information, including your name, mailing address and security information
- Add Your Account numbers (it may be helpful to have your paper investment account statement with you)
- Select"Online-only" as your statement delivery preference
Finally, a window will pop up that confirms your consent to receive electronic statements.
Existing users of PortfolioAccess:
- Sign into www.portfolioaccess.com
- Navigate to the "Site Options" to the top of the page to access the "eStatement Options" selection
- On this page, you'll switch your statement delivery preference from paper to online-only.
At this point, your statement delivery preferences are saved and beginning in the next statement cycle, you'll receive your statement notifications via email. Should your email ever bounce back, a postcard will be sent to alert you that the email address on file is not valid and ask you to return to www.portfolioaccess.com to update your email address.
To help you in this process, we've created the attached video demonstration to walk you through the sign up. Please note that this enhancement is not mandatory and if you prefer to receive paper statements, you do not need to take any action.
If you have any questions, please do not hesitate to contact Brandon Ideker to walk you trough this process.
Video: http://www.seic.com/enUS/advisors/events/3022.htm
All material represents an assessment of the market environment at a specific point in time and in not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for education purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. There are risks involved with investing, including loss of principal.
Information presented in this letter is believed to be factual and up-to-date, but we do not guarantee it accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expression opinion reflect the judgment of the author as of the date of publication and are subject to change.
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Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's investment portfolio. Cedrus does not provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein: and (iii) you should seek advice based on your particular circumstances from an independent tax advisors. Sources: Information provided by SEI Investments Management., a wholly-owned subsidiary of SEI Investments Co.