Netflix dropped a four-part documentary on Bernie Madoff earlier this year. It is a fantastic docuseries that recounted one of the biggest Ponzi schemes in history. The series featured personal stories of real clients who lost everything in Bernie’s scheme. As the series went on it seemed the story was less about Bernie and more about his legacy of deception.
Up until late 2008, Bernie was one of the faces you would have chiseled onto a Mount Rushmore of financial figures in America. The financial crisis of 2008-2009 exposed the misdeeds of Bernie and many others in the financial industry. Greed and poor decision-making were so widespread globally that trying to isolate a single cause is not possible. The overarching feeling was that the financial system seemed irredeemable.
The betrayal that many investors felt left them questioning the entire financial system and everyone who part of it was. The beneficiary of this feeling of betrayal was the newer concept of Do It Yourself (DIY) investing. The advancement of the internet offered access to the markets in ways that were not possible in previous years. Recently wounded investors immediately found a platform to bypass financial advisors. Investors flocked to firms that offered DIY platforms and reassured investors with catchphrases like “The average active manager can’t beat its benchmark.” These statements led investors to the conclusion that they should invest on their own rather than work with financial advisors.
The argument against DIY fell on deaf ears, and the DIY platforms had no incentive to redirect any of the accounts headed their way. Nearly fifteen years later DIY investing is bigger than ever. The trust that was once placed in financial advisors is now placed with DIY platforms. However, the results of people investing on their own has supplied study after study showing amateur investors are not well suited to DIY. Even Vanguard, one of the largest DIY platforms, released a white paper saying that advisors are worth a multiple of the fee they charge.
An analogy to describe what’s unfolded in the investment world would be like watching your favorite football team lose a game and deciding the best path forward is for you to strap on your helmet and get out there. The results would be predictable. You would do much worse than your team's starting quarterback. If you were a great quarterback, chances are you would already be playing on Sundays.
Twenty years ago, groupthink was to trust Bernie, today you are told you should invest on your own. It is groupthink that causes people to misevaluate the risks they take. Bernie’s legacy is the benchmark in taking advantage of the individual by misleading the group. DIY firms have redirected the group and each individual needs to take a moment and consider if the direction of that group is in their best interest. You owe it to your legacy to not be defined by Bernie’s.