Another financial advisor horror story...

[wildcat]

I found out a family friend invested a large lump sum with one of the big investment firms in the late 90's after the sale of his business. He had plenty of money (apprx 1.5 mil liquid) and 2 paid for homes.

I noticed over the years he started working again and his wife too (after taking care of the home for over a decade while he worked). Hmmm.... seemed strange but I figured it was boredom.

Come to find out they lost about 1.3 of it with this guy who had them invested on margin in several of the hot stocks of the 90s. He kept telling them everything was fine and they believed him. He still hasn't recovered anything over the last bull market - maybe $10-15,000 - either as he stuck with the firm but changed advisors. He is now approaching 58 years old and he and his DW are working harder than ever.

Lesson being that no matter how bored you are with investments, at least get a good basic understanding of investments so you can follow what the heck your advisor has done with your money and the potential fees you may be paying.

 

[2B]

I hate to admit it but this is the one time somebody would have been better off if they had been sold an annuity.

Unfortunately, fraud is rampant and the financially niave or those "trusting of strangers" are the easy targets. Here's a classic case to use when people want to know who's the best person to manage their money. (Answer: themselves -- always)

I'm sure the "advisor" made commissions on every trade or got his fee based on "assets under management." Buying on margin increases the amount of assets being managed -- higher fee!

There are legal options to use but it is difficult to ever recover lost money.

 

[mickeyd]

This may be a good time to discuss the Client Account Form that all investors are required to complete prior to opening an account with a broker and receiving an account #. It might look like a basic questionaire with simple questions, but it is the document that shows if you are suited for certain types of investments.

Never answer these Qs lightly or inaccurately. It could cost you dearly in the future. The broker is under no obligation to investigate the accuracy of your answers. For example, if you indicate that you are an experienced investor and enjoy an agressive growth position because of your $5 million trust fund and none of it is true, you are the one responsible for the results of the investments that are suggested and approved.

If the investor ends up in arbitration with the broker, the Client Account Form is the first thing that will come out in the defense. Most brokers require arbitration rather than a trial. Its' all part of your agreement with them.

Your family friend may want to review his copy of this important document.

 

[droubal]

That person should have used a fee-only advisor. They don't earn commissions so they don't have a need to put clients in lousy, expensive products. NAPFA has high standards for planners. They have a web site that helps people find honest planners.

 

[tryan]

I'ld run full page ads in the local paper pleading my case in the public forum to run these slim balls out of town.

 

[wildcat]

I think enough time has passed to really weaken his case if he were to take action. After all, he is still with the same firm - different guy. The previous FA got canned but he (in a short period of time) joined another firm in the same city. As far as his compensation went, apparently he was making a killing (and I mean a killing) on the margin fees.

A fee-based would have made more sense and so would self-education. I know I am young but I could have offered him some decent advice on this issue. He couldn't get over the age issue with me when deciding whether or not to ask for help.

 

[FinanceDude]

Truly a sad story.............

A couple thoughts:

1)If the broker pushed the margin agreement on the client (which he had to sign), the client could use that as a bargaining chip in arbitration. There have been numerous cases where people who should not have been on margin had it, and the arbitration panels have been sympathetic to them

2)It is unbelievable to me that your friend is STILL with the firm. After the 10th margin call, wouldn't the client have started questioning things? Sounds to me like they had blind trust in this FA...............

3)Your friend would not have been the only person who took a hard dive in tech stocks, and his story is not unique I am afraid.

FWIW, I never had any clients on margin in my 10 years of managing money. Margin interest is pretty high, and you end up selling off stock when it's NOT favorable to you. Just a point of clarification, brokers don't get paid on margin interest, their firm does.

As was pointed out, he should have taken action soon after the big losses occurred. The arbitration panel may not even look at things after all this time has passed..............

 

[youbet]

As was pointed out, he should have taken action soon after the big losses occurred.

A good action item going forward would be for him to learn some investing basics and move his money to Vanguard, Fidelity, Schwab, etc. and do it himself.

Everytime I hear someone asking about how they can find someone to "handle everything for me," I just cringe. It's like a crap shoot as to whether they're going to get screwed or not.

It seems that by the time you've gotten on board enough to be able find a honest/trustyworth/talented FA and monitor him/her, you probably know enough to do it yourself. A bit of a "Catch-22."

 

[FinanceDude]

A good action item going forward would be for him to learn some investing basics and move his money to Vanguard, Fidelity, Schwab, etc. and do it himself.

Everytime I hear someone asking about how they can find someone to "handle everything for me," I just cringe. It's like a crap shoot as to whether they're going to get screwed or not.

It seems that by the time you've gotten on board enough to be able find a honest/trustyworth/talented FA and monitor him/her, you probably know enough to do it yourself. A bit of a "Catch-22."

The only problem in your theory is I have seen PLENTY of people "blow themselves up" with NO HELP from an FA. From the guy with 100% of his 401K in company stock to the guy using Schwab.com to buy stocks on margin.

I have a mix of clients: Some don't want to manage things themselves, some who are pretty savvy, and some in-between. The most unique clients I have are two guys who are in M&E, and both have MBA's from the University of Chicago........

When I told them they didn't need me (duh), they both said: "We would like your perspective, not that we are going to blindly follow it, just so you know". Those guys are my two favorite guys, they know more than me but they like my input........

And we need to keep in mind the overwhelming demographic represented on this board: FIREd or someday FIREd people who TAKE initiative, LBYM, and so on. This DOES NOT represent the average American.........

Besides, most folks I know are too busy to keep up with changing tax laws, yield curves, estate planning nuances, etc, ALONG WITH a regular job........

 

[youbet]

The only problem in your theory is I have seen PLENTY of people "blow themselves up" with NO HELP from an FA.

Well, at least they didn't pay for being blown up!

And we need to keep in mind the overwhelming demographic represented on this board: FIREd or someday FIREd people who TAKE initiative, LBYM, and so on. This DOES NOT represent the average American.........

Yep, we are indeed posting on a board where the discussion tends towards understanding and doing it yourself, as opposed to the board where "selecting and working with your FA" is the main topic.

FinanceDude, I have no real problem with folks working as FA's or with FA's and, in fact, spend some time with them myself. I keep enough money with Schwab, with the resulting higher fees than Vanguard, because I get to sit down with someone there from time to time and get opinions, advise and, most importantly, specific instructions on the mechanics of handling certain situations and transactions.

My problem is with folks who are bright enough to learn the ropes themselves who want to just unthinkingly turn it all over to someone else, and with those FA's who are creepy enough to take advantage of them.

 

[My Dream]

Besides, most folks I know are too busy to keep up with changing tax laws, yield curves, estate planning nuances, etc, ALONG WITH a regular job........

And that was my situation, I was just to busy to learn and or look after our money so Ieft it up to an advisor that could dedicate there time, to something they knew best. Now that I have the time, I'll doing my best to educate myself, although I know it's going to take time.

 

[azanon]

Those guys are my two favorite guys, they know more than me but they like my input........

......... I like your input too.

 

[My Dream]

......... I like your input too.

I agree!

 

[FinanceDude]

......... I like your input too.

Thanks for that........

 

[FinanceDude]

I agree!

Thanks to you also........

 

[poyet]

You know what is unbelievable ? the fact that people are ready to work 70 hours per week for decades to put a small stash aside and not ready to spend 2 hours per month to care of it, to protect the end result of all the work done over years !!! It really does not make sense, whatever the reason they put forward to explain their behaviour.

You do not need to be a rocket scientist or financial expert to structure a portfolio displaying a volatility that you will psychologically sustain and to stick with it. It certainly requires less skills that those needed to make the money in the first place. And who else than yourself can better take care of your assets. Of course, you can consult with a FA, your BIL, FIL whoever you feel confortable with, but in the end the most important decision - knowing what to do with your assets - remains YOURS.

 

[My Dream]

You know what is unbelievable ? the fact that people are ready to work 70 hours per week for decades to put a small stash aside and not ready to spend 2 hours per month to care of it, to protect the end result of all the work done over years !!! It really does not make sense, whatever the reason they put forward to explain their behaviour.

You do not need to be a rocket scientist or financial expert to structure a portfolio displaying a volatility that you will psychologically sustain and to stick with it. It certainly requires less skills that those needed to make the money in the first place. And who else than yourself can better take care of your assets. Of course, you can consult with a FA, your BIL, FIL whoever you feel confortable with, but in the end the most important decision - knowing what to do with your assets - remains YOURS.

As hard as it may be to believe, some people just don't have 2 hours per month to take care of it. And it they decided that the 2 hours taking care it it was more important than spending time with there family, some just don't have the knowledge, therefore 2 hours wouldn't be near enough time. Please don't take offense to my comment. But that was my situation for many years.

I don't think it takes a rocket scientist to rebuild an engine, but most people would dissagree.

 

[astromeria]

You know what is unbelievable ? the fact that people are ready to work 70 hours per week for decades to put a small stash aside and not ready to spend 2 hours per month to care of it,

It only takes 2 hours a month or a quarter AFTER you read a lot, discuss a lot, and figure out your asset allocation (or even what that term means). It took me hundreds, maybe thousands of hours before I knew what I was doing enough to spend as little as 2 hours a month (and I spend more like 10 hours a week, if you count the reading I do aobut economics and investing on the internet).

Newbies are exposed to conflicting information and it takes a lot of exposure and thought to determine what is right for an indidivudal investor--Ray Lucia's buckets? Bill Schulteis' Coffeehoue Port? Scott Burns' Couch Potato port--and which variant? Vanguard Diehard style? DFA? Guru/newsletter? Company stock? Blue chips? Small alue? Foreign? Global? Bonds--govt or corporate? AAA or BB? Target Retirement? Alpha, Beta, Sharpe, volatility, benchmarks, index funds, active funds, ER...?

 

[REWahoo]

Newbies are exposed to conflicting information and it takes a lot of exposure and thought to determine what is right for an indidivudal investor--Ray Lucia's buckets? Bill Schulteis' Coffeehoue Port? Scott Burns' Couch Potato port--and which variant? Vanguard Diehard style? DFA? Guru/newsletter? Company stock? Blue chips? Small alue? Foreign? Global? Bonds--govt or corporate? AAA or BB? Target Retirement? Alpha, Beta, Sharpe, volatility, benchmarks, index funds, active funds, ER...?

You left out two biggies: Norwegian widow and working spouse.

 

[Outtahere]

Newbies are exposed to conflicting information and it takes a lot of exposure and thought to determine what is right for an indidivudal investor--Ray Lucia's buckets? Bill Schulteis' Coffeehoue Port? Scott Burns' Couch Potato port--and which variant? Vanguard Diehard style? DFA? Guru/newsletter? Company stock? Blue chips? Small alue? Foreign? Global? Bonds--govt or corporate? AAA or BB? Target Retirement? Alpha, Beta, Sharpe, volatility, benchmarks, index funds, active funds, ER...?

You've got that right, the more I read the more I'm confused I'm getting. It's taken me about 6 months to get to where I'm ready to do something. Now I have to figure out when, now or wait till the first of the month/year? Lump sum or DCA. I can see how people could just say "here take my money and do it", too bad they don't know the do it is going to do them in.

 

[astromeria]

You left out two biggies: Norwegian widow and working spouse.

How could I forget! The Norwegian widow wields a lot of influence on my long-term stock bucket. And my working spouse is kind of a fifth beatle wheel bucket--one that protects the other buckets from my greedy little hands, for now

 

[Zathras]

I can see how people could just say "here take my money and do it", too bad they don't know the do it is going to do them in.

Part of it is also the "that could never happen to me" syndrome. While it could 'do them in' more likely it won't destroy them financially.
Same reason people figure they won't get lung cancer, or don't really NEED medical insurance. People just have a general tendancy not to want to believe something bad could happen to them. So they take the easier way out.

 

[kcowan]

I think it is a failure of the education system to exclude even a basic understanding of investing fundamentals. I know when I tried to educate the employees in a company I was running, all I got were pitches from the industry that perpetuated the bad habits of relying on outsourcing of financial decisions.

 

[audreyh1]

It's true that you do need to dedicate several hours a week for about a year to "come up to speed".

But I just couldn't get over the fact that no-one else would be as careful with my money as I would, and the fact that an advisor's interests would not necessarily align with mine and in fact might well be counter to mine!

I think many folks are just easily intimidated into letting someone else manage their money.

But you would think that since most 401K's are self-directed, someone would gain a little experience that way.

Audrey

 

[tryan]

Here , I'll save everyone a couple hours per week/month:

Dollar cost average into no load index funds.

There ... all done.