Lessons from the Bernie Madoff Scandal

by Mike Lester

Jun 22, 2021

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Speaker 1 (00:02):

Welcome to the Retirement Wealth Podcast. Our goal is to help those retired or soon to be retired investors make more informed financial decisions and live an enjoyable retirement. Our host Mike Lester is the founder and CEO of Talon Wealth Management. Mike is an investment advisor, representative of Retirement Wealth Advisors Inc, an SEC registered investment advisor. Thanks for joining us today. And let’s get started.

Kristen (00:31):

There was a crime that stunned the financial world in 2008.

Speaker 3 (00:35):

He worked on a trading desk, stop what you’re doing for one second.

Speaker 4 (00:38):

As much as $50 billion is gone. Vanished

Kristen (00:42):

Bernie Madoff, the man behind the biggest Ponzi scheme in history. Yes, awful guy, but he died in prison recently while serving an 150 year prison sentence. Tens of thousands of people lost billions of dollars in that scam, including celebrities like Steven Spielberg, Kevin Bacon, even the late Larry King. This case probably caused a lot of investors, even listening today, Mike, to ask more questions about how their money is managed. What questions would you encourage someone to ask a perspective advisor?

Mike Lester (01:16):

First of all, obviously it’s confusing for individuals when they’re entering into a relationship with a financial advisor for the first time, or even just interviewing financial advisors and trying to understand how the financial advisor makes their money, trying to understand how their money is protected. If they’re working with a financial advisor, one of the things that I talk about when I sit down with individuals is just the reality that nobody wants to become the next victim of whoever the next Bernie Madoff is going to be. I mean [crosstalk 00:01:44]

Kristen (01:44):

Do people even cite that when they come into you as something that’s jarring?

Mike Lester (01:48):

They Don’t necessarily cite it, but I want to get it out on the table, right up front, say, hey, listen like I said, nobody wants to become the next victim of whoever the next Bernie Madoff is. So let me explain to you how it works with us and how we’re not the next Bernie Madoff. So essentially the way Bernie did things as he was generating statements and sending them to clients and those statements were fictitious. So the first thing somebody might wonder is well, how did you not realize there wasn’t money in your account? Or how did you not realize that this guy was stealing your money? And they didn’t realize because he was generating the statements and then sending them to [crosstalk 00:02:24] and it looked real and it looked like they had money in their account. They just didn’t have any money in their account.

Mike Lester (02:29):

So the way that we get around that and make sure that our clients are protected, even if they don’t know us very well right in the beginning, they’re just getting to know us and they’re hiring us to be their investment advisor. We’re explaining that we use custodians. So the money doesn’t come to Talon wealth management. It would go to one of our custodians. These are companies like Fidelity, Charles Schwab, TD Ameritrade. So the money would transfer out of your retirement account or whatever investment account you have right now into an account with one of our custodians. So we don’t have access to that money. We can’t pull money out or go to the someplace in South America that with no extradition issues with the US and just disappear with their money, we physically can’t take any money out. Now, what our clients have hired us to do is manage their money at the custodian so we can make changes.

Mike Lester (03:14):

We do make trades on their behalf because frankly, that’s our job. It’s our job to help clients get higher average rates of return net of fees than what they can do on their own. Because frankly, if we can’t get them higher average rates of return, net of fees, there’s no reason to work with us. And then at the same time, we can reduce the amount of risk they’re taking to get those returns are adding value there too. Because as you know, Kristen, and our listeners know most of our clients are either retired or very close to it. And they’re just looking for the highest rate of return they can get, but they’re not willing to take a lot of risks to get there. So going back to the question what questions should you ask a prospective advisor that you may want to hire?

Mike Lester (03:49):

Well, ask them if they’re a fiduciary, a fiduciary is required to put the client’s needs ahead of their own, meaning, there are plenty of investments out there, and a lot of them might be suitable for you. Meaning might get you the average rate of return that you need long-term might accomplish certain goals, but might not be the best of the options that are available to you. And a fiduciary is required by law to promote the option that’s best for you out of all of the options that are available to you that may or may not be suitable. So ask them if they’re a fiduciary. At the same time, just get an idea of if you invest with them, where does the money go? Who’s your custodian? Right? I mentioned, our custodians are companies like Fidelity, Charles Schwab, TD Ameritrade. There are other custodians out there, but just understand the mechanics of that.

Mike Lester (04:34):

And then take a look around. Nobody wants to work with a, for lack of a better word, fly by night [crosstalk 00:04:39] organization. Take a look at the corporation, take a look at the company, take a look at who’s behind the company. At Talon Wealth Management we’re very open about all of that with our clients. And certainly with anybody who wants to come sit down with us it’s interesting, Kristen, a lot of times people will be sitting and I can tell you the question they’re going to ask before they ask it because they dance around a little bit and they’re nervous to ask [crosstalk 00:05:02].

Kristen (05:02):

…let me guess. How much do you get paid? How do you get paid? No?

Mike Lester (05:06):

How do you get paid, no. Well, how do you get paid is one of them, but that’s easy. The hard question is I don’t want to offend you and I’m sorry to ask, but how do I know my money’s going to be safe with you?

Kristen (05:17):

You know what? I don’t even think that should be a problem asking that question. I guess that’s why I asked the other.

Mike Lester (05:22):

It’s not a problem for us at all, but they…

Kristen (05:24):

They don’t want to go, [crosstalk 00:05:26] “Hey, you can be a scumbag. How do I know you’re not a scumbag?”

Mike Lester (05:28):

They don’t want to go, “Hey, are you going to rip me off, or is this legit?” So I try to create a situation where people don’t have to ask me that question. I answer the questions that they might have about whether or not we’re legitimate and how is their money protected before they have to ask me that question. But sometimes they just want to know. So, Kristen, it’s important to work with someone you trust. You have to know your money’s safe. If you’ll just make sure that they’re a fiduciary for just make sure that their custodians are legitimate. If you just take a look around and trust your instinct, if it sounds too good to be true, it probably is.

Kristen (05:58):

Well, here’s an interesting headline. This one from Charles Schwab, the retail investing giant says that it added a record 3.2 million customers in the first three months of this year. That’s more than all of their new accounts opened in 2020 altogether. Schwab CEO acknowledges that part of the growth is due to certain names and social media of course, GameStop. Yeah. It’s a good thing that so many people are jumping into the market or maybe not. What do you think Mike?

Mike Lester (06:30):

Well, there’s a couple ways to look at this. And then when they say number of people jumping into the market, it’s easier to jump in the market these days than it used to be even five, 10 years ago, it’s an app on your phone, right? I mean, we talk about the evolution of the iPhone and it hasn’t been that long. I mean the 10 year anniversary was what a couple of years ago. So what are we 12 years into smartphones, even existing. And we feel today, like what did we do without them [crosstalk 00:06:55] I remember. Payphones. [crosstalk 00:06:59] …it wasn’t that terrible. Yeah. And somebody couldn’t get ahold of you every second.

Kristen (07:04):

That’s kind of a good thing sometimes [crosstalk 00:07:06].

Mike Lester (07:06):

But yeah. So technology has made it very, very easy. Literally just go on your smartphone and with a thumbprint, open up a brokerage account and start trading. And you can actually the minimums have gotten very, very small. So opening an account with a hundred bucks is pretty easy and the technology’s there. And then this is where we it, I guess it’s good that people are investing, but then also the frequency of these trades is starting to affect markets. And so when you get lots and lots of people and the GameStop thing that was mostly younger people with apps on their phones, they weren’t investing individually hundreds of thousands or millions of dollars, but there were so many of them investing small amounts that had turned into millions and millions of dollars.

Mike Lester (07:54):

And then the way the stock market works is it’s the frequency of the trading. So the ability to trade smaller amounts frequently, and the way that the rules work on trades and everything short squeezes and everything they talked about. So it became problematic there for some people. And then also great for others, I guess who made money. So is it good or is it bad? I think it’s great that young people are taking an interest. I worry a little bit about the interest that they’re taking. I think that a lot of people felt like, “Hey, this is a sure thing, and I can make money really, really quick.” And it almost has a sort of a gambling connotation. And I don’t want to investing to be that. I know it is that for a lot of people, but we never want investing to be gambling for our clients.

Mike Lester (08:36):

We want to make decisions based on probabilities, not decisions based on a lot of what we saw happen here recently in markets. So again, our clients are individuals that are either retired or very close to retirement. You have to find a way to make money on your money so that you can maintain your standard of living throughout retirement. But you have to adjust for things like inflation and taxes. And right now, if you take a look at bonds, this is just not going to do that for you and the bond yields are particularly low. If you take a look at real estate, that’s a little scary it’s over bought right now. If you take a look at the banks, although interest rates are probably going up, you’re not going to get paid very much to invest at the bank. So the most reasonable option for people who want to grow their money right now is the stock market, but you have to find a way to participate in the market without taking too much risk. Now there’s different ways to do that.

Kristen (09:30):

Oh, wait, do we need an annuity? Is that what we’re supposed to? Because that’s what they say.

Mike Lester (09:37):

Well, [crosstalk 00:09:37].

Kristen (09:37):

…in the commercials, in the mailers.

Mike Lester (09:37):

…the commercials. I know I’ve seen more and more of those commercials here lately. In my opinion, no, Kristen, I think annuities are going to cause problems for people. I reviewed some annuity accounts here last week. And a lot of these annuities fixed indexed as an example, I’m going to use right now, they look at the performance for over a 365 day period of time, right? One year. So it was a statement from April to April. And if you look at what the markets at over that period of time, basically markets were up 30 something percent over that period of time. This individual who was told that they’re getting stock market participation, no risk of loss made less than 1%.

Kristen (10:13):


Mike Lester (10:15):

Yeah. So I mean, it just doesn’t work that way, Kristen, at least in this particular fixed index annuity and many of these fixed indexed annuities. So you can’t just say stock market participation, no risk of loss. How much participation am I getting? I realized I can’t lose anything, but if the market’s up 30 something percent and I got less than one, that’s a problem. So investors are faced with Kristen, and we know this all kinds of just information and sales promotions and marketing is just dropped on them day after day, week after week and seminars and radio shows and everything else. And they just have to find a way to navigate through all of this information, to find out what’s going to be best for them.

Mike Lester (10:56):

And the problem is so much of it is bad information. And all we’re really trying to do here is help individuals make good decisions, make informed decisions. And so we’re happy to sit down and explain what we do and how we do it when it comes to manage money. Would an actively managed portfolio be in your best interest moving forward. I don’t know until we talk about it, Kristen, but if it is, at least we can have that conversation. Would an annuity be appropriate for you? I really don’t know until we talk about it, but if it was, we can give you all the information there, but that’s why we call it a complete financial plan is when people come and visit with us, we get the opportunity to walk them through all of the options that are available to them and just help them make informed decisions.

Kristen (11:38):

If you would like that insight so that if okay, everybody’s jumping in the market, is that what I’m supposed to do? Or should I be taking a deeper dive into what’s happening with my portfolio? Link up anytime at guardingyournestegg.com. Your pizza delivery person’s job may be in danger. Remember this?

Speaker 6 (11:54):

Get the door, it’s Domino’s!

Kristen (11:55):

Well, soon enough, you won’t be getting the door or picking it up by having them set it on your front porch. You’ll be going to the curb. The Domino’s CEO told CNBC that it’s currently testing a self-driving car to deliver pizzas in Houston.

Speaker 7 (12:11):

What we’re really focused on in our trials with neuro now is really understanding how the customer will interface with the robot at the curb. And then also how we integrate the robot into the operations at the store. long-Term, we see a robotic delivery as a part of our overall ecosystem, along with drivers in cars, bringing pizzas to customer’s home.

Kristen (12:35):

I mean, that’s different, but technology it’s changing [crosstalk 00:12:38]

Mike Lester (12:38):

Technology is changing everything, Kristen. I mean, back in the day, you could order a pizza for your friend at midnight, who didn’t order a pizza and you knew the pizza delivery person would be knocking on their door. And it just made you happy inside that the pizza guy was going to wake them up. [crosstalk 00:12:55] Now everything’s smarter. We’ve got smart phones, they can… You can’t send people a pizza when they don’t want one anymore. Much less have a robot do it.

Kristen (13:05):

Technology. It’s a great thing that iPhone that you’re always mad at because you still haven’t gotten used to it is capable of so many things, whether you’re an Android fan, it doesn’t matter. You can do so many things because of technology that you couldn’t before. But as a financial advisor, do you feel that technology has overall helped or hurt investors when it comes to managing their own portfolios?

Mike Lester (13:28):

So I’m a huge fan of technology, Kristen, I think it’s helped investors quite a bit. And now it’s changed markets, things work differently than they used to, whether it’s five years ago, 10 years ago, 20, certainly 30 years ago. Things have evolved quite a bit. I mean, if you were to go to the New York stock exchange right now, and you went down on the floor, you wouldn’t see thousands of traders in pits running around screaming hand signals. You wouldn’t see that anymore. It’s [crosstalk 00:13:53].

Kristen (13:52):

Just like you don’t call Domino’s [crosstalk 00:13:54].

Mike Lester (13:55):

Pre COVID I was usually up there at least once a year. It’ a pretty quiet place. They’re doing TV shows from the floor and stuff now. So technology has changed that. Technology has changed how we trade. We trade on our phones now, it was computers. But I think overall, the technology part of it is helping investors. It’s helping drive the cost of investing down and it’s helping people have access to investments that they typically wouldn’t have had access to before. I know that for advisors or, what we used to call traders, I don’t think it’s been as good. One of our advisors, Jim he’s phenomenal guy, but he had started in the financial services business in the nineties as a trader. Again, there were no smartphones, certainly there were computers, but people weren’t using them for trading. He and I were having a conversation the other day, and this brought this to mind, he was there exactly when Wolf of Wall Street when that movie, [crosstalk 00:14:49] that was going down and he said, “Hey, yeah, I mean, we were trading, but we knew exactly who he was.”

Mike Lester (14:53):

And Jim’s side of the story is he really was doing that stuff. So if you think that movie is crazy, according to Jim, it’s pretty accurate. And so that world of those traders and he’s like, Mike, what we used to make on a trade, you wouldn’t believe it. And he’s like, I’m so glad things have changed. And technology has forced it to the point where, again, clients don’t even pay for traits anymore, right? He was a product of his environment at the time, but that was how traders made money. They made money on the trades and it was a percentage. But it might be three to 5% on that one trade. And as you traded your portfolio, that’s how you were making money and investors at the time thought nothing of it. And that was just how it was.

Mike Lester (15:35):

Well, now it’s not like that. You don’t pay for the trades anymore. You don’t work with an advisor at least when it comes to Talon Wealth Management, whose interest is getting you to trade as much as possible so that it can make more money. We don’t make anything on trades, Kristen, our focus is helping you protect and grow your money as fiduciaries. We charge our clients a fee to manage their portfolio. As long as net of the fee, they’re getting a higher average rate of return. We’re providing value. If they’re not getting a higher average rate of return net of the fee, there’s really no reason to work with us. And like I say, all the time, most of our clients are retired or close to it. So if we can also reduce the risk they’re taking to get those returns, that’s valuable as well.

Mike Lester (16:11):

But in my mind, technology has come very, very hard to help investors. It’s very inexpensive to trade right now. You can actually get more participation in markets, much easier, and just the wealth of knowledge that we have. And we can actually educate people to a degree where they can trade on their own. You didn’t use to be able to do that, Kristen, you had to trust somebody to do it for you. So I know probably a lot of advisors are a little down on technology and how it’s changing their business. Our focus Kristen is to help our clients protect and grow their portfolios and adapt to these changes, moving forward. So love technology, and we are very, very passionate about staying ahead of it and helping our clients benefit from it.

Kristen (16:49):

Do you have the ability at Talon Wealth Management if you’re a client to go online and look at what has been going on with your account and see the graphs and all that nerdy stuff, is that possible?

Mike Lester (17:02):

Yeah. I mean, you have access to as much or as little information as you’d like to get. So any one of our clients can log onto their account at the custodian, our custodians are clients like Fidelity, Charles Schwab, TD Ameritrade. Again, you just go right to their website and you can see exactly what’s going on in your account.

Kristen (17:17):

Mike, I also think about technology, something it’s not capable of. And we talk about robo-advisors and things like that. That’s just having an online platform that manages all of your money, not you and your team honing in on feelings, goals, and trips and things with the grandkids and…

Mike Lester (17:35):

Yeah, just real life.

Kristen (17:36):

Yeah. Technology can’t do that.

Mike Lester (17:38):

Technology is great, Kristin, but it’s very cold. There’s nothing [crosstalk 00:17:43] warm about it.

Kristen (17:44):

With the group that you deal with baby boomers, they’re wanting customer service, meaning a human to talk to, am I wrong?

Mike Lester (17:52):

No, you’re not wrong. So technology and having a robo-advisor is certainly available to anyone, but not everybody’s looking for that. And frankly, those who are looking for it, it’s very easy to access. We’ve been talking about that on the program today and just now, but most of the people that we work with are looking for probably a combination of both. They like the idea of not having to pay trading fees. They like the idea of minimizing cost and their portfolio minimizing fees in the portfolio. They liked the idea of active management in their portfolio, but they also don’t want it to be a robot the whole time or a computer the whole time doing that. And so one of the things that we pride ourselves on is this combination of being able to provide the technology, provide the act of management, provide low cost solutions to actively manage portfolios.

Mike Lester (18:38):

While at the same time maintaining that human element, which means if you work with us and you have a question, you can actually talk to a person. You can talk directly to me, or if you’re working with another advisor directly to that advisor, regardless of what office you’re closest to, again, if you can hear us on the radio, there’s an office close to you, right? I mean, that’s the reason you’re hearing us on the radio, but regardless you can actually come and sit down and bounce ideas off of, or ask questions to any one of us personally face-to-face or over the phone. And that is one of the things that the robo-advisors are lacking. And frankly, some people just want a relationship with somebody that has a vested interest in them doing well.

Speaker 1 (19:18):

If you would like to have a comprehensive financial plan and an analysis of your current portfolio, go ahead and visit our website at retirement.tips/plan. And we can do that for you complimentary. Thanks so much for joining us on today’s show. Be sure to subscribe to our podcast, visit our website at retirement.tips for more free retirement planning and investment resources. Thanks for tuning into today’s show. And we’ll see you next time on the Retirement Wealth Podcast. Exposure to ideas and financial vehicles discussed should not be considered investment advice or recommendation to buy or sell any financial vehicle. This information should not be considered tax or legal advice. Individuals should consult with professionals specializing in the fields of tax, legal, accounting or investments regarding the applicability of this information to their situation. Past performance is not a guarantee of future results. Investments may fluctuate, and when redeemed maybe worth more or less than originally invested.

Mike Lester

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Lessons from the Bernie Madoff Scandal