It’s often said we’re a nation of whiney consumers and that unlucky investors are all-too-quick to file lawsuits. However, in my professional experience the opposite is true when it comes to investing: more-often-than-not, investors don’t investigate what caused their losses and don’t want to believe they’ve been victimized by someone they trusted enough to handle their savings in the first place. They’d rather go to the crook (aka “wealth adviser”) with whom they have a relationship for a reassuring explanation of where their money went than entertain they’ve been taken and seek out a second opinion that might sever the bond.
I’ve seen strong personal relationships at the center of financial dealings withstand even outrageously bad– devastating–investment losses. It makes little sense but many investors would rather believe impersonal, unforeseen market forces they can’t understand or control caused their losses, as opposed to someone standing immediately before them who they know and could easily hold accountable.
How crazy can it get? After I had investigated and reported to a client his family lawyer had been stealing money, the client told me that since the lawyer had agreed to provide free legal services in the future, i.e., work off the “debt,” he wasn’t going to prosecute.
“Let me get this straight,” I said to the client. “You’re gonna trust a known thief to handle your legal matters—little stuff like your will or the purchase of your home—because he’s going to do the work for free? Are you out of your f-ing mind!
What’s the value of legal services provided by a known felonious lawyer?
Something less than zero in my book. What are you going to do next, trust a doctor that’s lost his license to practice medicine to perform open-heart surgery on you?”
“But,” said the client, “I’ve known this guy for years. We’re really close. I went to his son’s Bar Mitzvah.”
“In case you’ve forgotten, we’ve discovered he’s been ripping you for years,” I said.
Victims struggle to maintain personal relationships with perpetrators. Go figure.
I’ve also found that people continue to respect financial firms that have been around forever—well after those firms have lost their credibility.
A Jesuit priest once memorably told me, “there are people who have reputations beyond their capabilities.” Truth be known, virtually all Wall Street firms have reputations far beyond their capabilities. Their voluminous histories of wrongdoing would make a serial killer blush. Trust none of them.
A decade ago, I was invited to give a speech at a Family Office conference where lackeys hired to manage billionaires’ family money met to discuss their lords’ investments and peccadilloes. These guys kibitz about important stuff like, “The head of the family prefers to lease a Lear Jet for the tax credits… Northern Trust offers great concierge private banking services.”
Never heard of “family offices”? Here’s the low-down:
People who are knowledgeable and successful in their operating businesses (e.g. software), when they’ve amassed so much money that they are effectively in “the business” of managing it, set up family offices to manage their family wealth and tend to their unique personal needs. These uber-wealthy families admittedly know a lot about their respective operating businesses—the businesses that made them wealthy. But when it comes to the business of managing wealth, family offices know squat. Worse still, they unwittingly hire veterans from the wealth management industry who lack knowledge of fiduciary principles and, as a result, recommend firms like their former employers to screw the family.
At the conference, I was trying to wake up the complacent crowd to the fact that Wall Street was not their friend. They were polite but clearly not on board with my seemingly subversive message. A voice from the audience stated or asked, “Well, at least if I hire Goldman Sachs to manage the family money, no one can ever criticize me. Right?”
Oh my. Did I really just hear what I thought I heard?
To put the statement in context, I was giving the speech shortly after Matt Taibbi of Rolling Stone magazine penned a lengthy and widely-discussed 2009 article about Goldman in which he referred to the firm as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” The entire world had come to the realization that Goldman was evil incarnate and the firm was reeling from the bad publicity.
Goldman most trustworthy in the world to handle family money? You’d have to live in a galaxy light-years away for the news of Goldman’s reputational nose-dive to not have reached you. Or, could it be the Family Office folks lived in an alternative universe populated with rarefied beings—a world where bad things don’t happen to trusting, good (i.e., rich) people? A world without Madoff?
In recent years I’ve been watching the mismanaged investments of another class of supposedly savvy investors—sovereign wealth funds. These emerging heavyweight investors—new to Wall Street—seem to be making all the wrong moves, such as blindly trusting the same old investment powerhouses that have proven to most Americans they can’t be trusted.
Worse still, sovereign wealth funds (like U.S. public pensions) get seduced into “exclusive” strategic partnerships with Wall Street’s “finest.” Little analysis is undertaken regarding concerns that are paramount to institutional investors in America today such as conflicts of interest, fiduciary duties, corruptive industry practices, undisclosed and excessive compensation arrangements, fraud and misrepresentation and their impact upon net performance.
Scrutiny of the integrity of investment service providers to sovereign wealth funds is lackluster, at best.
A few years ago Libya’s sovereign-investment fund filed suit against Goldman alleging devastating losses of 98% of a $1.3 billion bet on currency movements and other complex trades done with Goldman in 2008. The Libyan Investment Authority claimed that Goldman took advantage of the LIA’s financially illiterate staff and seduced its staff with gifts and bribes.
The LIA claims that they completely trusted Goldman and believed that its former head of North Africa was “their very close friend.” Last I heard, Goldman had won the legal battle.
For those who aren’t billionaires or sovereigns, rest assured these investors have no special market insights or edge over you. They get fleeced all the time by Wall Street. They’re just better at hiding the damage.
As long as enough water pours into a leaking bucket, it will always look full.