Investment Managers and the Returns Dilemma

Investment managers who have gone through college to earn the required degree, put in long, hard hours in building a reputable career, and those who have always put the client first have found themselves mixed in with managers that have cheated Americans out of millions of dollars.  As a result, consumer confidence has plummeted, with people having no trust that investment managers will help them enjoy returns being promised.  Although there are a number of reasons for this returns dilemma, much of it can be directly linked to Bernie Madoff and his scam in stealing from people and

Investment managers who have gone through college to earn the required degree, put in long, hard hours in building a reputable career, and those who have always put the client first have found themselves mixed in with managers that have cheated Americans out of millions of dollars.  As a result, consumer confidence has plummeted, with people having no trust that investment managers will help them enjoy returns being promised.  Although there are a number of reasons for this returns dilemma, much of it can be directly linked to Bernie Madoff and his scam in stealing from people and leaving many financially ruined.

When it came to investment managers, Madoff was one of the top Wall Street professionals.  Telling his family, friends, and investors that he had more than $17 billion in funds, the truth finally came out when he confessed he had ripped people off.  Known as a “Ponzi scheme”, Madoff talked people into investing large sums of money on bogus investments.  To make these investors believe they were seeing incredible returns, he used money he ripped off from additional investors.  For a while, money came in and early investors were covered but as the scheme grew, the more recent investors became suspicious in that they were not seeing returns on their investments.

For masterminding this crime forced on the American people, Bernie Madoff was arrested, charged, and is now serving 150 years in prison.  While this case involving investor managers and the dilemma on returns is the most recent, you can be sure it is not the only one people in this country have faced.  Sadly, while many other Bernie Madoff’s have been put in prison for crimes such as this, many others are still working behind the scenes, devising a way of taking money from millions of innocent people.

Obviously, if you have money to invest, you would benefit from the services of a highly respected investment manager but the question becomes how to find one and how to identify a criminal.  Typically, experts in the financial and banking sectors would tell you the best way to avoid scams such as the Ponzi scheme would be to do your homework.  This would involve reviewing reports for investment managers interested in, paying close attention to the string of numbers.  However, to make sure you are never trapped in another Bernie Madoff situation, you have to do more.

Remember, the people who invested with Madoff were extremely knowledgeable when it came to investments so if they could be scammed, someone with moderate, little, or no investment experience would be sucked in quickly and have no clue what hit them.  For one thing, while the goal in working with an investment manager is to see returns, if you take a lesson from Madoff you would see that during the entire time he was ripping people off, he had virtually no losses.  Well, in the world of investing, remember that you would expect losses just as you would returns.  For this reason, when no losses occur, it should be viewed as a major red flag.

In addition, if you want to hire an investment manager and avoid the returns dilemma, you need to learn to value steady returns.  When you see consistent returns, even if they are not of substantial value, it shows that your money is in fact being invested but without the investment manager taking major risks or being involved in fraudulent activities.  Unfortunately, greed played a huge role in the Bernie Madoff situation in that investors were seeing large returns and loving all the money coming in.  However, making serious returns should be another red flag in that with most investments, returns are slow and steady, not fast and huge.

Finally, to make sure the investment manager you hire is honest and doing his or her job legally and ethically so you see returns, you need to create a serial correlation, which would be the degree of how returns for every month mirror the results of returns from the prior month.  If you find your investment is the exact each month, or even very close, you need to ask why.  Remember, the market fluctuates, which means you would expect small, moderate, and large changes in returns.  Therefore, returns that are always the same or close to the same would be suspicious.