I have never been a fan of the asset management, wealth management, whatever you want to call it industry. The premise of the investment manager is as follows:
"You Mr. Investor have a lot of money, and I, though I have less money than you, am actually better at investing than you, even though that might seem hard to believe because, as I said, I have so much less than you."
"Nevertheless, because you are so busy and have so little time to read the news wires and crunch numbers, I will do it for you, but instead of being paid according to the time and resources I dedicate to the task, you can pay me according to the value of funds that I manage for you. That way I get to be more profitable simply by adding new clients with no extra work at making investment decisions."
"But I don't expect you to just pay me for the service that I offer. No, in order to incentivise me to actually succeed in my endeavours, you will agree to pay me according to the return on your investments, say 20% of any return over a stated benchmark."
"But since you will appreciate that as well as being dynamic and creative, I also have a cautious side, I will ask you to measure my performance not so much against the actual return you make, but against the performance of the market in general and also against the performance of other fund managers. In practice this means that you pay extra for my skill and judgement not because I am good at my job, but because I am not as dumb as the next guy".
So who falls for this crap? Well, quite a lot of people actually because Andrew Cuomo, the New York attorney-general, on Monday filed civil fraud charges against the hedge fund manager Ezra Merkin, alleging he channelled more than $2.4bn to Bernard Madoff’s Ponzi scheme in exchange for lucrative fees.
The move is the second action in two weeks against one of the feeder funds that sent billions of dollars to Mr Madoff, who pleaded guilty to one of history’s biggest investment frauds. Mr Merkin, a leading figure in the New York charity community and former chairman of financing company GMAC, of steering money from charities, universities and non-profit organisations to Mr Madoff and being paid about $470m in fees for his three funds.
Hang on a minute there. $470m in fees for $2,400m in investment? Merkin passed over $2,400m of client money and Madoff paid 20% of that money back as commission, and Merkin didn't bat an eyelid? He really thought Madoff was so good at investing that he could give the market a 20% head start and still earn enough to pay management and performance fees to Merkin and Madoff? What do you think?
So what of Ms Horlick, who as you may remember won our Financial Crime of the Year Award in 2008, not for investing with Bernie Madoff, but for crying foul when Madoff was accused of fraud. Investment managers are supposed to know what they are investing in. That after all is why they are paid (see above). But if Merkin was paid 20% commissions by Madoff, how much was Ms Horlick paid for delivering her clients' capital?