Are High Net Worth Individuals Daft?

Looking at the state of most financial markets together with performance of most economies today, it is difficult to defend the view that most people should be left to their own devices and that there's little justification for heavy-handed economic regulation. The excesses and outright folly that led to the mortgage crisis and the financial crisis will not be rehashed here. Still, in looking at the disclosures that have arisen detailing the the fraud executed by Bernard Madoff here and similar unethical action by Arthur Nadel here, leads me to ask the question that is the title to this post.

These two examples are obviously not the norm in the financial services industry but I reckon that there are probably enough funds announcing returns that are fictitious and enough gullible investors putting in more money. With the benefit of hindsight, it is possible to see that the returns were just too good and that many more people ought to have been suspicious. In both cases, it appears that some objective person asked the questions but was totally ignored and probably derided.

Secondly, the calibre of people who invested in both funds are not the typical street chap with a low income and who should be "protected" by intrusive regulation as the argument is often framed. To my mind, it is clear that Bernard Madoff and Arthur Nadel deceived very educated and presumably sophisticated professionals who were also quite affluent.

Thirdly, I am even more suspicious of any investment manager who claims that the success of the firm is dependent on a proprietary instrument programme such as the one used by Arthur Nadel's firm.

The final point is that industry newsletters are probably not the best sources of objective information primarily because they are avenues for seeking business or self-promotion. Judging from their long record of deception and the fact that Arthur Nadel was once declared Top Money Manager in the US, most business journalists appear to be just as naive. The most worrying point for me is not that such deception took place but that the clients who in many cases entrusted both firms with lifetime earnings did not identify the mistakes contained in their reports as this ought to have led to the demand for better information.

There's no good solution here and it is clear regulators and most industry peers were completely clueless even when the consistent returns should have led to the suspicion that this was a very unlikely record. Perhaps this is the time to review all the monthly newsletters from investment advisory firms. I am certain that a number will show that Madoff and Nadel are not alone. What this portends is the rise of savvy data analysts who should make some money from reviewing industry reports to identify inconsistencies that may reveal these errors. These people are most likely to be found in the market than in a regulatory office.