There is no denying it: the face of the financial industry has changed immeasurably in the past 12-months. If the collapse of both Lehman Brothers and Bear Stearns was a shock, then the news that Bernard Madoff, the well respected financier and former head of the NASDAQ had masterminded what some refer to as “largest investment fraud in Wall Street history” was astounding. What was even more astonishing was that it took the regulators so long to smell a rat.
Celebrities, pension funds and individual investors were all defrauded, triggering a general lack of trust in the asset management industry and an increased focus on due diligence by the regulators. The question now is:
How does the asset management industry recover and communicate that they have moved on, post-Madoff?
Communication is the Key to Restoring Confidence
Investors crave transparency from their asset managers.
Regulation changes clarity. Central to the debate on how the asset management industry can restore confidence is regulation. In fact only last month, the SEC’s internal watchdog put forward 58 different recommendations to overhaul the agency and try and regain some credibility. Asset managers should tell their clients about the proposed changes.
Strategic transparency. While it will take time to regain investors’ trust, constant communication is going to be key. Being as transparent as possible with your investment strategies and educating uneasy investors is crucial.
Move Towards More Due Diligence and Education
Increased due diligence communication. The finger of blame pointed at many firms arose from the lack of due diligence they had undertaken on their investments. Investors in some funds of funds, for example, had no idea who actually held their assets. Now, as the industry moves out of this difficult period, pension funds must know who holds those assets and they must communicate that knowledge to their investors.
Educate Investors. Individual investors too are becoming more financially savvy and are undertaking their own research and due diligence to safeguard their investments. Here’s one resource from the Financial Planning Association (FPA) that is helping investors to educate themselves post-Madoff. Those firms that take a lead role in educating their clients, whether it is institutions or individual investors, will stand out among the crowd.
Building for the long term
Certainly, damage has been done. But there is no reason why the industry can’t move forward in a positive way by becoming more open, more communicative and by providing clients with the education and answers they need. In fact, we could be sitting here in years to come saying that this was the shake up the industry needed.
Do you think communication is becoming clearer from asset managers in the post-Madoff era?
(photo by borman818)
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