The Practice Doctor is IN

Al Depman, CLU, ChFC, CMFC, BH

Lessons from Mr. Madoff

Like many of you, I admire a well-constructed crime caper. The Sting, Mission: Impossible, The Great Train Robbery, even the twisted machinations of the Joker in The Dark Knight, are but a few examples of intricate planning, execution, and dénouement in film. When a real-life crime operation is exposed, we can’t get enough detail. 

From Al Capone to Enron’s attempt to manipulate the energy market, to the esoteric packaging, selling, and insuring of sub-prime mortgages, there is no shortage of egos looking for ill-gotten gains. The latest, and one of the more audacious, is the unfolding story of Bernie Madoff.

Witnessing the layers of Madoff’s scam being peeled back, I’m amazed at the financial carnage, human gullibility, and lack of accountability being exposed. These are all malevolent consequences, greedy and evil to the core. I do not dispute that in the least.

However, there’s a bit of Bernie-wannabe in every financial services practice. In consulting with advisors over the years, there are certain characteristics most try to attain, all of which Madoff had seemingly perfected:

• Credibility
• Charisma
• A lofty goal for a minimally-acceptable prospect
• Efficient pre-screening of prospects
• Consistent returns
• A protective organization

Let’s take a look at each one.

Credibility

Advisors aspire to build a strong credibility factor into their practices. Early in an advisor’s career, credibility is most likely earned through hard work and tenacity. Later, it might be capped off with the attainment of a CFP designation. Wouldn’t it also be nice to have decades of pioneering work in the world of market-making, as well as experience as a past chairman of Nasdaq before going into the asset management business? Madoff had instant credibility stemming from being a highly respected investment trading insider. Ultimately, he squandered it.

Charisma

Never having met the man, I can’t attest to his charisma on a personal level. But from the stock photos of Madoff, there is certainly a “you can trust me” quality to his droopy, puppy-dog face. His persona was “Bernie”––accessible and approachable. There are many charismatic advisors in our business. The advantage for these advisors is that people will buy more on faith than on due diligence. The disadvantage is that once the advisor leaves the relationship, there is often little evidence to back up the logic behind the sale that was made.

I looked up Madoff online. According to FINRA’s BrokerCheck listing for him:

“This broker has passed:

 0 Principal/Supervisory Exams
 2 General Industry/Product Exams
 1 State Securities Law Exam

And is currently suspended.”

He’s also has three disciplinary actions on his record. A little research can put a nice dent in one’s charisma (not to mention, credibility).

Minimally-acceptable prospect

In order to become a client of Madoff’s, it appeared one needed to have a minimum investment of $10 million. I’ve encountered a few advisors who have a million dollar minimum. Most are happy to work with less. I can only fantasize telling a prospect: “Sorry, your $9 million portfolio is insufficient. Let me refer you to my junior advisor.”

Efficient pre-screening of prospects

This is actually the coolest piece of Madoff’s operation: he never really had to do any prospecting. Madoff positioned many centers-of-influence around the country and the world. These COIs, Madoff’s surrogates, would be approached by people wanting to get into the credible, charismatic Madoff funds. The COIs would screen these candidates for him. If they passed, they were usually in. If not, too bad (or, as it turns out, good for them). Wouldn’t it be great practice if you were continually sent pre-screened, $10 million clients from a vast international network of trusted birddogs? This would be a Client Acquisition System for the ages.

Consistent returns

Madoff’s stated strategy was to buy large cap stocks and supplement those investments with related stock-option strategies. The combined investments were supposed to generate stable returns and also cap losses. Many investors attempted to mimic this formula and failed. The fund continued to report modest gains even through the early stages of the credit meltdown. How attractive is that? In this case, “past performance is no indication of future returns” is all too applicable. The interesting thing about this is that I have worked with advisors over the past quarter who have successfully protected their clients from heavy losses. These are folks who can point to a strategy that has minimized the risk and can be considered equally impressive.

The difference is in transparency. Gary, in central Illinois, is one advisor who anticipated the crash and protected his clients. He’s more than happy to share his philosophy and strategy. Madoff shrouded his system in secrecy, adding to the mystique, but ultimately proving unsustainable and fraudulent.

In practice management parlance, Madoff’s Case Development System was complex and unverifiable. His Client Management System was similarly weak in that the communication of results to each client was superficial and unsupported by facts (as opposed to invented “facts”). This is the charismatic sale at its most insidious.

A protective organization

To cap it off, Madoff surrounded himself with seemingly competent professionals who protected him from too much scrutiny. The goal of a practice’s Time Management System is to keep the advisor doing only the things he or she does best while delegating the rest. In Madoff’s case, he was off doing what he did best––figuring out how to keep the Ponzi scheme alive. His associates did the rest, seemingly oblivious themselves to the scam. Heck, they even fended off the SEC!  In his Communication System, Madoff gets good grades for keeping the team effective in their work, but the lowest possible grade in honesty and integrity about the firm’s core values.

It’s a dream scenario for an advisor: being sent pre-screened, high-quality prospects who immediately fall under your spell of credibility and charisma, ask few questions, and want desperately to be part of your clientele. Your team keeps everyone else at bay so you can move easily among exclusive networks around the world, being philanthropic and enjoying the high life. The investment community holds you in high esteem.

Too good to be true? In the Madoff case study, yes. At the core was a corrupt Case Development System combined with his incredible, amoral chutzpah. 

Taking a solid, transparent track record, an advisor can certainly attain a version of that dream scenario. With strong business systems in place, a fully-informed team, transparent due diligence, and core values of honesty and integrity, the truly trusted advisor is positioned to be the antithesis of Bernie Madoff. It’s our duty to counterbalance his poisoning of our well! 

The Doctor is OUT.

Al Depman, CLU, ChFC, CMFC, BH, a.k.a. “The Practice Doctor”, is MitchAnthony.com’s Business Practice Consultant. He is the creator of “The Practice Management Assessment” tool and materials and has authored numerous articles in professional publications on practice management, and author of the forthcoming book, How to Build Your Financial Advisory Business, to be published by McGraw Hill in 2009. Al combined his Liberal Arts studies with 10 years of management experience with McDonald’s Corporation to enter the financial services world 25 years ago. Since then, Al has evolved from an MDRT-level sales rep into a full-time consultant specializing in helping others engineer their business practices to the next level. Contact him at al@mitchanthony.com.

© 2008 Al Depman