Madoff Lesson: Avoiding the Ivy Conflict

Chidem Kurdas

It might be called the Ivy question in assessing an advisor, one of the lessons investors take from the Madoff disaster.

Lawrence Simon and Howard Wohl, who founded Ivy Asset Management in 1983, met Bernard Madoff in 1987. They not only invested with him but also brought to him other asset managers who paid them fees for the privilege of being introduced to Mr. Madoff.  In the early 1990s Messrs. Simon and Wohl heard rumors. By 1997 they had evidence that Madoff was not doing what he said he was doing.  

Suspecting a Ponzi scheme, they reduced Ivy funds’ own investment with Madoff to a minimum. But they did not warn the other managers they advised—who continued to pay fees for the access the Ivy founders had provided to Madoff.

Those fees would have stopped, of course, had the outside managers been told that Madoff was likely a fraud. In other words, Simon and Wohl had a major conflict of interest as advisors to outside funds. If they were to fully express their suspicion, their fee revenue and advisory assets would have gone down. Not by a huge amount, mind you—at most 15%.

Keeping up assets and revenues was particularly important as Simon and Wohl sold Ivy to Bank of New York in 2000, each making $100 million in the deal. After that, Ivy pulled out from Madoff altogether and steered new clients away from him. But the old advisory clients stayed put.

You could have inferred what Simon and Wohl really thought of Madoff by watching Ivy’s shrinking and eventually disappearing exposure to him. “Do what they do, not what they say,” would be a good rule for investors. Ivy had a high reputation and around $15 billion in assets at its peak.

But perhaps investors should never agree to pay ongoing fees for access to any given manager, no matter how attractive the returns, because that just creates a potential conflict of interest.  Once a fee stream is in place, the advisor has an incentive not to tell those clients to drop the manager.

I’d guess Simon and Wohl will be busy with legal matters for some time, including the fraud complaints brought against them by the New York State Attorney General and the US Department of Labor – pensions lost money in the debacle – and the suit by investors. Whether it was worth protecting Madoff-related advisory fees and assets is a question they might ask themselves.

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6 Responses to “Madoff Lesson: Avoiding the Ivy Conflict”

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