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Coaches Corner

Principles-Based Wealth Management

by Bruce A. Blessington

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A knowledgeable financial professional observed recently that most folks he knew were currently in one of two positions: cash or fetal. The number of investors in the latter position recently increased with the news that wealth management guru Bernie Madoff apparently “made off” with their money.

How could it be that so many sophisticated individuals and institutions enthusiastically participated in this, the mother of all Ponzi schemes? Perhaps some set aside general principles of prudent investing and relied on such feel good notions as shared religious faith, membership in the same social organizations and recommendations of friends. Perhaps others really never codified these general principles into specific personal rules that would govern their wealth management decisions.   

Bernie Madoff’s madness is a learning opportunity not to be missed, a chance to formulate and commit to some fundamental principles of managing one’s money.

You are ultimately responsible for managing your own financial assets. You can seek advice, vest in your advisors/managers discretionary power to execute transactions and delegate administrative details. By all means, seek out a skilled, trusted and accredited financial advisor to serve as a “coach” for your financial decision making. What you simply mustn’t delegate is the responsibility for preserving, protecting and growing your own money. Many people see this as a huge burden, requiring great intellectual fire power and familiarity with complex financial instruments. In fact, the requisite knowledge can be acquired with no greater mental effort than that needed to become a good bridge or chess player. What is required is the interest and the motivation to learn.

Never invest in any financial instrument that you don’t fully understand. Mr. Madoff’s clients violated this principle in every instance. When I say fully understand, I mean that you have mastered the details well enough to explain the transaction, its potential risks and benefits in sufficient granularity such that your spouse, significant other (or interested friend) “gets it” and could explain it to someone else. Hopefully, he/she will ask further probing questions that will sharpen your focus and identify any “holes” in the story. Part of the learning mentioned above is doing the grunt work of due diligence on every significant financial decision.  

The current melt down in the derivatives market was fueled by supposedly sophisticated investors trading in opaque instruments of intentionally fiendish complexity that, unfortunately, they did not understand. (You betcha that the guys who structured these “securities” understood them.) When Enron was touted as a great buy, an experienced businessman friend of mine looked at the analysts’ reports and the company’s filings and concluded that he wouldn’t invest because he didn’t understand the business model. “I just don’t get what they do,” he said shaking his head, “maybe I’m not smart enough to appreciate their new way of thinking.” By adhering to this principle, my friend avoided a loss when Enron finally imploded.

Be aware of the risks of entrusting your wealth management to a sole practitioner or a private entity. With this assertion I’m sure to attract bags of hate mail from the multitude of honest investment advisors/managers who are dedicated to the wellbeing of their clients and have done them great service. However, the risk analysis goes this way: people are people and sometimes they become bad. As Rabbi Marc Gellman of Newsweek said, “People don’t get bad all at once.” It’s the little knick here, the tiny slip there and the shortcut somewhere else. Pretty soon the moral compass doesn’t point true any more. When this happens and the Wall Street Journal is reporting your sole practitioner’s flight with clients’ funds, you’ve likely experienced an unrecoverable loss. Humans are subject to all sorts of pressures. A personal, financial, emotional or health crisis can erode your advisor’s judgment and performance. You may not be aware of his/her distress until it affects their practice and your financial wellbeing.

Even though a privately held wealth advisory and management firm with multiple partners mitigates the risk outlined above, it may not go far enough. Few such enterprises are prepared to provide their clients with proper audited financial statements or have an internal controls structure of sufficient robustness to mange risk and assure transparency.

Avoid financial advisors/mangers that are also brokers or dealers selling securities for a commission; they have a conflict of interest. I offer due respects to that legion of brokers who have done well by their clients through good times and bad. Nonetheless, they operate under a structural conflict of interest. This conflict is bounded between acting in your best interests and their earning a living through transaction generated commissions. Who are they today; investment advisors or salesmen? When are your interests and the broker’s aligned and when aren’t they? It is impossible to know. The client can never be sure if the investment is being recommended by the broker because it is best for the client or because it will enhance the broker’s earnings.  

In some large institutions, there are fee-for-services financial advisors/managers, organizationally separated from a brokering/dealing unit. Be sure that the appearance and the rhetoric about “firewalls” and “no conflicts” matches reality. By the way, Madoff reportedly told his clients that all of his remuneration was earned from commissions. Of course it turned out that he really derived his income from the alleged scheme. Nonetheless, his assertion was a red flag and a violation of this principle.

Wealth management partners that are publically traded and advise/manage financial assets on a fee-for-services basis are the safest choice.

This is only a starting point for due diligence. A number of the firm’s characteristics need to be evaluated:

• Understand the business model. Is it a bank, a bank holding company, an investment bank or a pure wealth manager?
• How do the financials look? If it’s a bank, what is its ratio of capital to assets? Know how to dissect the firm’s statements. Your accountant does. Ask him.
• Does the firm trade for its own account? (red flag). If so, what assurances/safeguards are there that would prevent a rogue trader from taking down the entire institution? (see Barings Bank).
• How is your account held? Who does the firm use as a custodian? They should be well-known, reputable and independently audited.
• What is the scope and charter of the internal audit and compliance staff? How many and to whom do they report?
• What sort of errors and omissions coverage does the firm carry; how does this apply to the assets held in your account?
• How is the client relationship handled? Is the person who plans and executes the investment strategy for your portfolio the same person with whom you will interact?
• How many clients per manager? How much turnover is there in these positions?
• Do you understand their investment strategy?
• Is client participation in portfolio management sincerely encouraged?
• How are investment vehicles selected and approved for inclusion in client portfolios? Can you describe the process? What sort of investment instruments are allowed?
• How have client portfolios performed? Be sure to segment performance statistics by type of portfolio (high growth, conservative, fixed income, dividend growth, etc.) as compared with appropriate broad market indices over a representative time period (1 year, 3 years, 5 years).
• Understand the fee structure. Does the firm earn any income from transactions?

The answers to these questions should help you form an educated opinion about the character and quality of the institution. The diligence dialogue should also give you a sense of the personal chemistry between you and your prospective portfolio advisor/manager. This relationship is critical to the success of the partnership. If you aren’t comfortable - don’t proceed. A good test of your comfort level is to imagine that you are deceased and your spouse/heirs will depend upon the advisor/manager’s wisdom, advice and integrity. Are you still comfortable?

These five principles are offered for the same reason that combat forces have “rules of engagement”. Both are necessary to eliminate the second guessing and uncertainty that often accompanies critical decisions made under pressure. These principles and the rules of engagement are meant to create a framework that prevents “ad hoc” choices--choices which, when driven by the seductive nature of the immediate decision-making environment, may lead to disastrous outcomes. It was this seduction that brought investors to the evil embrace of Bernie Madoff.

About the Author:

Bruce is a retired public company CEO, with forty years in business. His broad industry experience includes  health care, environmental measurements, construction , chemicals, plastics and defense. Bruce’s background spans startups to Fortune 100 firms with global responsibilities as well as public and private company board experience. He was most recently CEO of Ferraris Group plc. and previously CEO of Bionostics Inc. He currently serves as a non-executive Chairman of Flight Landata, Inc. and as a Director of Seabrook International, Inc. He is a certified member of the National Association of Corporate Directors (NACD) and a veteran of the US Navy Submarine Service. He resides in  Georgetown, Maine with his wife Marie. For more information, please call (508) 353-6401 or email:

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