After Bernie Madoff, knowing who to trust with your investment funds
When the Bernie Madoff affair shocked the nation, investors began wondering who they can trust. What matters more in an investment manager: the quality of an individual or the institution? How the pros pick who to trust with their investment funds.
Rusty Leonard and Mark Regier have a lot in common. Both are investment industry professionals, evangelical Christians, and believers in working only with trustworthy business partners.Skip to next paragraph
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They differ, however, in one area: how to figure out who can be trusted with their investment funds – and who can't – a talent that could have been put to great use before the Bernie Madoff affair. The question seems to grow more critical with every scandal, fraud, and high-profile disappointment from a CEO.
In today's business world, investment managers say, skill in discerning character is every bit as important as being able to decipher a balance sheet or earnings report.
But how does one do it?
Mr. Leonard relies in part on indicators of executives' character to judge whether a company is in good hands. Portfolio managers at his money-management firm have sold stock on at least two occasions because the CEOs were leading flashy lives, cavorting with multiple women, and demonstrating an apparent lack of moral values.
"If you know that a guy is divorced three times, so on and so forth, then you see how he acts," says Leonard, founder of Stewardship Partners in Matthews, N.C. "Parties that cost $2 million and that sort of thing – if you knew about that stuff, then obviously you [as an investor] would run for the hills.... The Lord says, 'He who exalts himself will be humbled.' And if [a CEO] gets humbled, I don't want to be part of that process."
'What do you value?'
Mr. Regier takes a more open-ended approach. As director of stewardship investing at Mennonite Mutual Aid (MMA), he asks what a company professes to value besides profits, then looks for evidence and expects proof to get stronger over time.
"We are very cautious about the practice ... of using executives' character as a driver for investment decisions," he says. "We've learned [that] good people, whether through their own devices or systems that they're caught in, can end up doing ... some very bad things. We want to see systems [of accountability to ethical standards] embedded in the company."
As Congress considers how regulators might protect consumers of financial products, some in the industry are getting out front by emphasizing their own wolf-spotting credentials.
"Even if you're referred to [an adviser or money manager] who's supposed to be a person of character, you still have to check them out," says Bonnie Kirchner, a financial planner in Marion, Mass., and author of "Who Can You Trust With Your Money? Get the Help You Need Now and Avoid Dishonest Advisors."
Formerly married to Ponzi scheme operator Brad Bleidt, Ms. Kirchner says clients should be suspicious whenever they get vague answers about how their money is invested or how their investment team is compensated. Character is revealed in part, she adds, when professionals own up to their mistakes.
In quests to discern character, approaches vary widely. Some professionals trust intuition while others look for measurable, objective cues. In the end, the question is not only whom to trust, it's also what to trust in making that determination.