Lessons can be learned from Madoff, the ‘Herod’ of investment

Police say, too many times, that criminals target people they know well. In many of these cases, crimes are committed through an exploitation of trust. Among investors, the obscene fraud committed by Bernie Madoff was the headline betrayal of trust during the financial crisis. Roger Urwin, global head of investment content at Towers Watson, adds some black humour to convey the magnitude of the US$50 billion graft: “Madoff is to investment what Herod was to childcare,” he told the annual Fund Executives Association Ltd [FEAL] Forum in Melbourne last month. He says the unearthing of Madoff ’s swindle made investors reassess their relationships with managers, and further undermined the financial industry as its credibility was under attack. “After an incident like that, you have a different industry.

You may say: ‘Only in the US’, but it has had worldwide repercussions.” Although Australians did not fear their retirement savings were endangered by a Ponzi scheme, the trust they placed in the $1.2 trillion industry was tested. Urwin believes it is not enough for super fund trustees and executives to regain the confidence of members: they must exceed expectations of their capabilities and accountability because “the value proposition isn’t good enough in our industry”. Members have been reminded that financial markets can undermine wealth as effectively as build it. In the relationship between trustee and member, trust is confident reliance on a person in the risky world of investment, Urwin says. In this situation, trust is built by aligning the interests of trustees and members, practising organisational values, transparency and communications, and delivery of products through investment choice and implementation.

He says super funds should assert their position as asset owners more actively to demonstrate to members that they are in control of their relationships with consultants and managers. “It’s the structure and food chain that is critical in rebuilding trust to a level that is higher than it was before.” He says pension funds spend an average of 5 basis points on their own operations, from executive management to boards, then 60 basis points on investment management. Funds managers then control a further 35 basis points of costs through their arrangements with brokers. “This is a very strange food chain,” Urwin remarked, particularly when managers perpetuated one of the major myths of investment: “the track record speaks for itself ”. “’This is the biggest lie in investment management.