Finding Money Manager Candidates
Recognize, however, that if you get the referral from a financial planner or investment advisor, that he or she may get a cut right along with the money manager.
Under most circumstances, professional money managers don't come cheap. The typical structure of a hedge fund is "2-and-20," meaning that the manager gets 2 percent of the top, plus 20 percent of the profits. That's every year. If you are paying your broker or advisor for putting your money in place, that can make things worse.
Madoff's structure was unique in that he charged nothing for his purported money-management services (that should have been a red flag right there... there are no financial-services charities). He claimed to be happy just earning the commissions on the trades made in his money-management business. He also didn't dip into the management fees that advisors charged customers to put money with him; that created an incentive for advisors to throw money his way, because they could collect a fat fee for the privilege.
Perhaps the most heinous case actually involved a Connecticut "money manager" (it's in quotation marks because his actions made it clear he wasn't really managing money himself) whose idea of handling a client's portfolio involved giving all of the money to Bernie Madoff. The customers were aware that the money manager invested with others, but had no idea that they effectively were paying their advisor a 1.5 percent fee for handing the money over to Madoff and doing nothing else. On a $1 million account, the intermediary scooped up $15,000 for not actually running the money. That would have been bad enough with a legit manager who simply had a bad year; when Madoff's fraud was exposed, it had the consumers thinking their trust was violated twice.
By Chuck Jaffe