US Outlook: Bernard Madoff added something unexpected to his list of apologies in court this week, as he was trying – and failing – to avoid the maximum 150-year prison sentence for his crimes. "I feel terrible that an industry I spent my life trying to improve is being criticised terribly now," he said.
It was nice of him to care, but the investment management industry is actually going to be a great deal stronger in the future because of his appalling betrayal. Professional managers and individual investors alike have learnt a great lesson from the Madoff affair, that lazy research and uncritical due diligence processes will see you being conned.
The most extraordinary thing about the debacle is not how many people were taken in – though the number is staggering – but just how many people were not. Time after time, potential investors on Wall Street examined what was known about Madoff's miracle-grow trading strategy, and concluded it was impossible. Repeatedly, professionals swapped suspicions that Madoff must be doing something illegal, though they could not put their finger on what. Even potential investors in the "feeder funds" that were channelling money to Madoff needed to ask just a few questions to become suspicious. Many baled.
This research takes time. It requires every potential investor to remember that above-average returns have above-average risks, and to identify what they are.
The real, positive legacy of Madoff is that due diligence can no longer be outsourced. Trusting that other people have done it for you is dangerous both financially and legally, since negligence claims will surely follow. An industry that asks more questions will be a stronger one.