7 Ways Bernie Madoffs Scam Forever Changed Advisors Lives
7. Skeptical centers of influence.
Madoff was the ultimate example of an advisor who was trusted by influencers such as lawyers and accountants. Now such professionals may think twice before sending their clients your way.
Restoring the old level of trust in the industry may take something extreme, Gronich opines. Somebodys going to have to step up, a government agency, a self-regulatory organization or a watchdog and say, Were going to provide some due diligence and ferret out the guys you can trust.
6. Suspicious minds.
Bernie Madoff made the world a little more cynical. As a result, its become harder to persuade prospects to become clients. Logically, they may know they stand a miniscule chance of getting scammed, but they simply dont want to take that chance, says Gronich. Its like not letting your kids go to the park to play unattended, he says. You dont want to be that statistic.
5. More audits.
Advisors are much more likely to be audited in the post-Madoff era, whether they are under SEC or state jurisdiction. Some states more aggressive stances have included ditching the random-audit approach in favor of periodic audits for every firm. For its part, the SEC says its significantly increasing the number of audits it conducts. Thats time wasted (for RIAs), says Gronich. Its two days youre not servicing clients and billing.
4. State supervision.
Registered advisors with $25 million to $100 million now fall under state oversight rather than SEC oversight, which is widely seen as more lax. Those people would have been largely unregulated had they been at the SEC now are at the state, where theyre certainly going to be looked at and audited, says Gronich.
The change was part of the Dodd-Frank reform bill. Again, although Madoff isnt solely responsible for financial reform, his misdeeds helped form a critical mass that made reform inevitable.
3. Fill out the form.
Another of the SECs efforts to protect consumers is its new, more detailed Form ADV Part 1 and its amended Form ADV Part 2. On ADV 2, the commission did away with the old check-the-box, fill-in-the-blank format, requiring advisors to describe the firms investment strategies, business practices and advisor qualifications in a plain English, narrative form.
Filling out the forms has been burdensome enough for advisors that RIA in a Box has done a brisk business handling the job for a fee, says Gronich. Again, the Madoff connection is indirect, but its hard to imagine his scandal didnt give the SECs reform efforts a good push forward.
2. The custody rule.
The SEC faced heavy criticism for failing to detect Madoffs misdeeds, so it has tightened the regulatory net. Advisors who also custody clients assets -- as Madoff did -- are now subject to surprise annual examinations by independent accounting firms.
Advisors must foot the bill, which is typically at least $3,000, says Zachary Gronich, founder of consulting firm RIA in a Box.
1. Meet your new RIA neighbors.
Under the Dodd-Frank financial reform law, hedge fund managers with more than $150 million in assets must register with the SEC by March 30, 2012. The whole point of running hedge funds used to be that they were unregulated and could play the market in more or less complete stealth.
Thats changed, and the publicity around the Madoff scandal helped create the impetus. Hedge funds and private investment managers will have to file paperwork and change protocols for things like bookkeeping, asset-valuation and asset-custody to meet the SECs standards.
To many, the Bernard Madoff scandal is fast becoming a distant memory. After all, the jaw-dropping news of his arrest in December of 2008 has since been overshadowed by everything from Japans nuclear disaster to the near-default of the United States.
But financial advisors are continually reminded of Madoff as they deal with everything from added compliance responsibilities to increased mistrust from the public. Heres a look at seven ways the scandal -- and other smaller ones, including the Allen Stanford scandal -- have impacted life for financial advisors.