By John Newsome on 15th January 2009

Those old wives knew a thing or two. A stitch in time does save nine. The road to hell is paved with good intentions and if you give a certain type of individual sufficient rope, they usually end up hanging themselves. Interestingly, such people often show up in politics or finance.

Several of the world's major banks and fund managers have been caught in the alleged $50bn fraud perpetrated by Wall Street 'investor' Bernie Madoff. Among those affected is 'superwoman' Nicola Horlick's Bramdean Asset Management. We've long thought superficial to be a more appropriate adjective in her case, a notion reinforced by her comments that "the strategy we were supposedly buying into was very conservative" and last May, "Madoff is very, very good at calling the US equity market". Whatever Mr Madoff was very, very good at, it wasn't that. According to prosecutors, Madoff described his operations as "all just one big lie … basically a giant Ponzi (ie pyramid) scheme".

It's long been our belief that financial services has become a marketing industry. Collectively, it promises plenty but delivers little. All those adverts showing retired fifty somethings hand in hand on a tropical beach, the result of a pension invested with a major bank or insurance company. As if …. in reality the same companies are sending out red inked warning letters informing endowment holders their policies will not come close to paying off their mortgages. If your endowment policy is up the swannee then it's more than likely your future pension funded trips to Mauritius are too.

Legal & General (L&G) announced recently that 2,300 individuals who invested in two if its funds have fallen victim to the collapse of Lehman Brothers. L&G has written to clients warning that a fifth of their capital was no longer protected from falls in equity markets. L&G went on to say that it was the first time that a bank underwriting capital protection had failed. Maybe so; White Star Line probably said it was the first time one of its ships was sunk by an iceberg but it's not much of an excuse. In our view, structured products like these, dependent upon derivatives, are wholly inappropriate for the vast majority of private clients. We put them in the same category as hedge funds, and wouldn't touch either with a bargepole.

In our opinion, conventional investment wisdom has taken the asset management industry to a place where it ceases to add value for many of its clients. Investment returns don't just happen; long term success requires patience, knowing what you want to buy and what you believe you should pay for it – and even then, you'll make some mistakes. Medieval alchemists tried unsuccessfully to turn base metals into gold; all too many stockbrokers and asset managers have mastered the process in reverse.

John Newsome can be contacted on:
01423 705123