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Saturday, December 27, 2008

Do financial advisors do any work?

What's interesting about the whole Madoff story is how little work financial advisors seem to do for their gigantic fees. From the WSJ articles, such as this one and this one.

Stanley Chais sold a strategy known as "The Arbitrage". But his strategy seems to have been to invest all the money with Madoff's Ponzi scheme, according to Chais's accountant. For this single decision, he charges fees of 4.5% of clients' assets. One investor had $65 million invested with Chais, which at 4.5% was netting him almost $3 million every year for basically passing the money on to Madoff.

The Fairfield Greenwich group invested $7.3 billion of other people's money with Madoff, from which they seem to have received a 1% management fee plus 20% of the fund's profit. Assuming Madoff had a year in which he reported a 14% return, that's $277 million in fees.

Robert Schulman ran Tremont Group Holdings, which is owned by a large insurance company. Investors in Tremont's Rye Select funds run by Mr. Madoff paid annual fees to Tremont of 1% to 1.75% of assets. That seems to be $33 million to $57 million annually in fees.

Victim Burt Ross thought he was diversified. He had money with Madoff, and with two other firms. He didn't know it, but the second firm, Mr. Merkin's Ascot fund, was entirely invested with Madoff and adding 1.5% in fees, and the third firm, Gabriel, significantly so. Note none of these advisors seems to have looked at Ross's portfolio overall and disclosed the degree of concentration in one financial advisor.

All of these advisors have long pedigrees in the investment business. How did they think Madoff was generating these returns -- particularly since they emphasized to clients how diligently they were taking care of the client's money?

Did they not look at anything, OR -- and here we go into conspiracy theory -- did they pass along Madoff's thin and incredible strategy story because they believed Madoff was really investing in something he couldn't reveal, something perhaps terribly illegal?