THE BLOG
05/19/2009 09:17 pm ET Updated May 25, 2011

3% a Month. Are You In?

Here's the deal: You will be investing your money in an "Equity Options Fund", which is a hedge fund. Your principal is protected while the fund generates 3% a month through an "innovative" options trading method. The trading strategy is very sophisticated. It is a "short straddle or "strangle" strategy. The fund will write offsetting puts and calls on major stock indexes. That's why the risk is limited.

Are you in?

It was too good a deal for clients of WealthWise and its president, Jeffrey A. Forrest, to pass up. More than 60 clients invested $40 million in Apex Equity Options Fund.

Here's what Forrest didn't tell his clients: He had a side deal with Apex. He received a percent of the performance fee that Apex paid its fund manager. He also didn't tell his clients that their assets accounted for more than 90% of the total assets invested in Apex.

You can guess the rest of the story. Apex engaged in a risky trading strategy and collapsed in 2007. WealthWise (you have to love the name) clients were wiped out. The SEC barred Forrest from the securities industry for five years.

The appeal to greed causes investors to abandon rational thought. "Risk free" investments include FDIC insured Certificates of Deposit and Treasury Bills. If a six month Certificate of Deposit is yielding 1.73%, is it really likely that you can get 36% a year without taking a huge risk?

Trust in financial advisors and financial planners is often misplaced. While few engage in the outrageous conduct of Forrest, most recommend high expense ratio, actively managed funds that are likely to underperform the indexes over the long term. Many advisors receive fees (typically disclosed) from the mutual funds they recommend to their clients, called 12b-1 fees. If your advisor or broker accepts fees from the funds he or she recommends, can their advice be objective?

Financial planners often use planning as a hook to gather assets so they can collect these fees and annual advisory fees.

The sad truth is that assets of investors are being skimmed (if not plundered) by the securities industry which adds costs and rarely adds value. Most investors would be better off without them.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.