Madoff’s reporting red flags led to demands for transparency, but what’s changed in 15 years?

Featured in International Adviser:

The 15th anniversary of Bernie Madoff’s conviction, a milestone that marked the exposure of the largest known Ponzi scheme in history, worth an estimated $65bn, was just last month. His arrest revealed that the company’s client reports had been falsified. This revelation, along with the numerous reporting red flags that surfaced post-Madoff, raises a pertinent question: Are asset managers now providing the level of detail in their client reports that investors demand for transparency? asks Julien Dumont, product director at NeoXam.

The Madoff case was a wake-up call, exposing the inadequacy of the client reports provided to end-clients. These reports were basic, lacked digitisation and personalisation, and were inflexible in terms of frequency. While standard monthly, quarterly, and year-end reports outlining essential portfolio performance information were always there, they have now evolved to include more detailed insights about ESG performance or other extra-financial information, reflecting the changing interests of investors over the past 15 years.

Indeed, as periodic reporting grows more complex amid new requirements like ESG, investors are increasingly seeking more granular insights into their portfolios – particularly during periods of market stress. The collapse of Bear Stearns in March 2008 precipitated a spike in redemption requests from skittish investors who were invested in Madoff’s fake fund. In the last five years, while there hasn’t necessarily been the same level of fear to trigger mass redemption requests across the industry, events such as Russia’s invasion of Ukraine and the September 2022 Gilts crisis have posed nightmare weeks for asset managers.

When these events occur, investors inevitably demand more insight into their portfolios, leading to a rising number of requests for information from their fund managers. When the calls come in, it can cause utter chaos for those needing to put their clients’ minds at ease, mainly when their data management and reporting systems are not linked. Anyone who has worked in a client servicing capacity for an asset manager with archaic systems will know that tracking down the correct information in times of market stress is not always possible at short notice, and this can have a material effect on the long-term relationship between an investor and their manager.

The level of detail and clarity investors now get from the regular reports they receive from investment managers far exceeds what they could have expected in years gone by. However, there is still work to do when it comes to more bespoke calls for information. Many asset managers continue to rely on siloed legacy systems, with data scattered across the business and reporting solutions that need to be designed with modern asset or information types in mind. In addition, some actors also depend on BPO services that fail to meet expectations, which can result in ‘black boxes’ offering little or no flexibility.

Since Madoff’s fall from grace, nearly everyone has been aiming to increase investor demand for transparency and verifiability across the industry. Still, the task at hand will only be completed once all asset managers can depend on smooth interoperability between strong data architectures and modern reporting solutions.

Related insights

Download NeoXam brochure

Neoxam needs the contact information you provide to us to respond to your inquiry. You can withdraw your consent at any time. To learn more about the protection of your personal data, we invite you to read our Privacy Policy.