How Do Brokers View Nuns and Teachers?

As potential victims, of course.

They both have the perfect profile: Unsophisticated investors. Trusting and caring people who place the interest of others over self-interest.

Enter the slick broker.

The victimized nun wasn't your regular nun. At age 64, she inherited $532,000 in mutual funds from her deceased mother. But she had a problem. She had taken a vow of poverty. She wanted the money to go to her religious order.

Her friendly broker was just the person to guide her back into poverty. He cashed out $125,000 of her holdings and instructed her to endorse the check and return it to him. She did so and he deposited the funds into his personal account.

But she wasn't broke yet. There was more work to do. In a somewhat convoluted scheme, he scammed her out of the balance of her holdings and deposited those funds into his personal account as well.

Fortunately, the broker put his ill-gotten gains to good use. He formed a company geared to marketing his investment services to athletes!

Was the broker with a pump and dump operation? Not exactly. He was employed by Legg Mason which was acquired by Citigroup.

All of this was too much for FINRA, the toothless tiger that "self regulates" its colleagues in the securities industry. It barred the broker for life.

What about the teacher?

She had significant funds in an IRA account. An insurance agent authorized by her school district to pitch annuities to teachers as part of their 403(b) plans, met with her in the teacher's lounge. He had a great deal for her. How about taking her IRA account and investing it in an Equity Indexed Annuity?

Under the best of circumstances, Equity Indexed Annuities are very dubious investments.

A former SEC economist noted that they have "high hidden costs" and "extraordinary commissions".

Putting an Equity Indexed Annuity within an IRA would almost never make sense. IRA's are already tax deferred and subject to penalties for early withdrawals. The teacher is being charged for the tax deferral benefit of an Equity Indexed Annuity which she already had in her IRA. In addition, this annuity imposed a fifteen year penalty period for withdrawals, which makes extricating from it very expensive.

The agent was pretty happy. Sales of these "insurance products" typically generate up-front commissions ranging from 5%-10%.

I have this theory about market beating advisors and brokers. When they talk about "retirement planning", it means they are planing to retire with your assets. When they talk about "wealth management", it means they are managing to transfer your wealth to them.

You don't have to be a nun or a teacher to be a victim.

But it helps.

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.

Comments

[ash711]

06:03 AM on 05/21/2009

I forgot to post a quote from the article that says it all about Equaity Indexed Annunitys(EIA's):

Third, a white-paper was done by a former SEC economist and PhD specifically on the merits of EIAs. Here’s the bottom line: “We estimate that between 15% and 20% of the premium paid by investors in equity-indexed annuities is a transfer of wealth from unsophisticated investors to insurance companies and their sales forces.”

[AngelaQuattrano]

11:04 AM on 05/14/2009

It seems the corporate sycophant position is still that investment advisors have no obligation to their customers, and every single person in the country who has a retirement to invest is obligated to learn not only as much as the broker who is pitching them, but should hire a team of private investigators and lawyers to determine he is telling the truth. Otherwise, they deserve to be ripped off, and now it is clear that the brokers see ripping off just such naive investors as their moral obligation.

[SteveNichols]

11:41 PM on 05/13/2009

For the short time that I have been involved in blogging I have read all or most of your positing in the Huffington Post . I notice that you always portray any individual in the financial industry as a theft, a crook,a dishonest individuals that kick dogs, takes candy away from baby's and steal from nuns and teachers. Never I have you ever posted any positive suggestion or financial advice that would help any individual. You do your best to create distrust and fear among anyone who is even thinking about investing any of their saving or earning in any kind of investment instrument. Always its isolated instanced of some bad broker who cheats people.I'm sorry but there are bad real estate agency contractors, plumbers, mechanic, lawyers, teacher, politician, CPA, and people who write investment book.But does this mean everyone in these professional are bad. What is in it for you? Just trying to sell more books. All the advice that you have in your books is it even relative in this economy? The rules have changed, has you investment advice changed? I work in the industry,

[Dan Solin]

01:32 PM on 05/14/2009

I was able to figure out that you worked in the industry.

I have written many blogs telling investors exactly how to invest. Here is one blog for you to review:

http://www.huffingtonpost.com/dan-solin/its-so-easy-your-broker_b_56296.html.

My gripe is with brokers and advisors who claim they can "beat the markets". Unfortunately, this includes more than 95% of the industry. I stand by my condemnation of them as people who are marketing a skill they do not have to investors who don't know any better.

The data supporting my investment advice in all markets is extensive. It is summarized in my books, and in books by John Bogle, Burton Malkiel, William Bernstein, Larry Swedroe, Mark Hebner, Allan Roth and in hundreds of academic, studies.

I am aware of no data supporting the advice given by most brokers and advisors every day to their clients.

[SteveNichols]

03:36 PM on 05/14/2009

I have no problem with the article, I actually work for one of the organization that you mention. The advise you gave is sound in principle. My area of angry is that the way you describe brokers like the one that cheated the nuns and teacher, These are not the norm, at least not in my experience but rather the acceptation. People believe that all brokers fall into this category. I have no idea of where you come up with the figure of 95% of all brokers believe that can beat the market. If that your opinion find state that it your opinion, If an investor does not fully check out a adviser track recorded then that their fault. Take to some of his clients, call the regulatory board to see if he has any complaints. Due diligence is the responsible of the client as well as the adviser. These people you condemn should be single out, just don't make it seem that all broker or adviser fit into this category.

[ash711]

06:49 AM on 05/15/2009

You know I would agree with you that there are plenty of honest investment advisors but the fact is that YOUR BEEF should be with the million dollars earners in your industry. They have screwed everyone starting with all the investment banks on Wall Street. The world financial system was nearly destroyed BY WALL STREET AND THEIR GREED. The superstars in your industry created derivatives and as Warren Buffet said, they are Weapons of Mass Destruction. In the last ten years the DERAVITIES MARKET GREW TO BE 550 TRILLION DOLLARS IN VALUE. The problem is world GDP is only 55 TRILLION, even experts in the field(like Satyajit Das) knew it was a GAINT PONZI SCHEME and wrote about a PROBABLE MARKET MELTDOWN IN EARLY 2007. In Mr. Das's book "Traders, Guns, and Money" he states: "No money is ever really made in financial markets. Markets merely transfer wealth. As to how to make money? Well, it is basically theft, misrepresentation, lies, cheating,deception or force. It is impossible to make the staggering amounts made in derivatives in good years honestly." I have to say that CNBC has to be one of the biggest frauds and whores for Wall Street and they have been at it for 20 years.

[petef59]

10:13 PM on 05/13/2009

...continued...corporate PR sycophant

[petef59]

10:12 PM on 05/13/2009

...contiued... rationalization, bs, bamboozling

[Boiler20]

07:38 PM on 05/13/2009

For instance, in variable annuities, the commission is often taken out of your account value on your statement, like a mutual fund load, to pay the broker or agent. With fixed annuities, 100% of your money is invested and the annuity company must pay the agent's commission out of the annuity company's margins or profits, similar to a travel agent. YES, it is true that the customer ultimately pays the commission- but also remember that the customer also pays for the profits for ANY company in ANY business.

OK, I'm now officially typed out. (I know....'thank God!')

Do your homework people! If not on the investments, then on the advisor or broker or agent. Pay attention to your statements!

////////////////////////// WARNING: DO NOT use this post as personal advice. It is for educational purposes ONLY. You MUST consult your OWN licensed advisors in your state who can assess your own individual circumstance. Laws change all the time. ////////////////////////////////

[AngelaQuattrano]

11:00 AM on 05/14/2009

So do you have a comment to this article? There is a reason why the length of comments is limited. If what you have to say is so valuable, perhpas you could interest the site in giving you a blog. I can't tell what your point is.

[Boiler20]

04:51 AM on 05/16/2009

WOW.

God forbid you might have actually read the posts and learned something.

Question: What's it like have a such a negative outlook and being bearish on life itself?

Now go apologize to your loved ones and friends for being so negative all the time.

God forbid

[Boiler20]

07:37 PM on 05/13/2009

Again, she retreated back into her 'comfort zone' and said 'Mister Bozo has always treated me well and he said if we just wait this out, we should be ok.....and that I just shouldn't worry myself about it...the best thing to do is not to even pay attention to it or even open my statements.....'

Really?

REALLY?

Hopefully you can see that there is no one panacea type answer for everyone. While admittedly I have NOT read any of Dan Solin's books, as I just recently became a subscriber to this blog, I will be going back to read his other entries and read his books. From the handful of blog entries that I have read, he seems pretty insightful. Just not on everything. Hopefully he reads this and takes the time to do his home work on fee structures and the differences of variable annuities, fixed annuities and fixed indexed annuities.


....continued.....

[Boiler20]

07:35 PM on 05/13/2009

Not to mention the fact that all of the funds were large cap for the most part, or balanced. Why not be done with it and just buy the S&P 500 etf? And, to add insult, this guy put the other 10% back into the market on 12/31/08. Gee, think he was trying to hit a sales goal or pay for the Christmas presents?

She was blindsided, and retreated back into her shell and said 'well, Mister BOZO I'm sure would NEVER do anything that wasn't the right thing for me. Afterall, they've always been good to me so far."

REALLY?

And we haven't even mentioned the fact that BOZO had her basically in 100% stocks, at 65 years old, with no pension and no 401k or rollover. I asked her what her account balance was and she said she didn't know, but that 'Mister Bozo' told her 'well, Sally, you know you've got more money than most, and it's not like everyone else isn't also in the same boat as us....' I walked her through registering and logging in to her account online and she was dis-believing that her balance could possibly be only $220,000.'


.....continued.....

[Boiler20]

07:34 PM on 05/13/2009

It is my policy to ask to see any prospective client's and client's tax returns. I noted there were $110k in capital gains taken in 2008 in her $450k account. I further questioned her and saw at first that this 'advisor' had sold her out completely last spring of her entire account amongst 6 different equity and balanced mutual funds, all with a top 10 mutual fund family. I was thinking 'ooh, good sage move'. She'd been in them for almost 10 years. Then I saw the brokerage statement and discovered that exactly one week later, he'd put 90% of it back into other mutual funds, spread across 7 different mutual fund families. How many mutual funds you ask? Of course, were they no-load? No, not 7 funds, or 15. Or 20, or 25 different mutual funds. This BOZO / SHARK (which is worse?) put her in TWENTY SEVEN different mutual funds. ALL in 'A' shares, meaning he snagged 5.75% commission, or about $28,000 in commission, all taken out of her balances, and never took advantage of a single break-point. Nice pay day, BOZO. And for that, she had to pay $11,000 in capital gains taxes, which she needed them to cut her a check for out of her account.

.....continued.....

[Boiler20]

07:32 PM on 05/13/2009

And yes, independent brokers and advisors also have some lazy or unethical people in their ranks. For instance, just last month, I had a prospect come in to my office who blindly trusts the independent advisor her deceased Dad set her up with 15 years ago. I asked to see her tax return, which she provided, and all supporting documents, for the past 3 years. This 65 year old single woman didn't think she'd have much capital gains tax to pay 'because Jim said so, and his assistant Melissa said so too, and they treat me right, and he's also a Certified Financial Planner, so he'd never tell me wrong and he's always been right before.' Really? My next, automatic question, whenever I hear they use a CFP, is 'when or how often does your CFP ask to see your tax return, or does he have a division and a tax accountant to do that for you so he is aware?" To date, in over 15 years of independent practice, not a SINGLE person has ever answered 'yes, he does review my tax return'. UNBELIEVEABLE folks! And taxation is one of the 11 topics covered in the CFP exam, for gosh sakes!

....continued.....

[Boiler20]

07:31 PM on 05/13/2009

They ARE out there. You've just got to do your homework and not hit the 'easy button'. And don't be afraid to ask about their track record the last 24 months ( and don't accept the typical stock response of '...well, John, that's an impossible answer- all my clients have different needs and preferences." Force him to answer the question- any question you have is a good one, and ANY advisor or broker or agent that's worth his salt can provide to you his 'model' portfolio and prove it. If he can't, then RUN, do not walk, away from him. Also, I would lean towards a broker or advisor that is independent. Yes, there are some brokers at the big wirehouse brokerages that are great at what they do. However, there is, imo, an inherent conflict of interest due to the investment banking relationships of the brokerages, their 'research' departments, and so on down the line. An independent advisor should have no allegiances to any one or two insurance or mutual fund companies.

Think about it for a minute. Why would ANYONE who is TRULY good at giving investment advice or managing risk, ever want to work for someone else?

...continued.....

[Boiler20]

07:30 PM on 05/13/2009

The moral and how it applies: People always want the one sentence answer, the 'easy button', the easy way out. These subjects are painful as they are not their area of expertise so they feel 'dumb' or 'ignorant'. Ignorance is no excuse. We are ALL captains of our own ships. These 'meek lambs' were hogs with their time and efforts in doing their due diligence. Yes, it was probably unbeknownst to them at the time that they needed to do more fact checking, etc.,...but it's just not enough to go on the word or endorsement of a friend at work or the lodge.

For the record: Regarding variable annuities, about the only time they are even somewhat appropriate (and maybe not even then) is for someone who has maxed out their contributions to their company sponsored retirement plan, then maxed out any contributions to IRA's in all forms, and then have money they don't need to see until retirement, IF they are in their 20's or 30's. However, if they are that far from retirement, why not invest in some good large cap stocks in industries that provide staples to living with DRIP programs? Or, even better yet, why not do your homework and find an advisor of the highest moral principles who has a logical, disciplined and well-thought out risk-management gameplan for investing?

.....continued.....

[Boiler20]

07:29 PM on 05/13/2009

/////////////////// WARNING: DO NOT use this post as personal advice. It is for educational purposes ONLY. You MUST consult your OWN licensed advisors in your state who can assess your own individual circumstance. Laws change all the time. ///////////////////////////////

In summation, DO YOUR HOMEWORK! Even if you hire advisors. There is no substitute for education. I am continually bewildered at the jilted investors interviewed on TV after they've lost their life savings, playing to the camera, and possibly the courts, as 'the little lost, meek, unknowing, lamb that was led to slaughter' by the big bad broker or advisor and they conveniently leave out the fact they didn't do any background check on the advisor, check his credentials, disciplinary records, etc.,...ask for references BEFORE they cut the check or transferred the money.

There is an old saying in the markets that applies far beyond investing:

"Bulls win.
Bears win.
Hogs get slaughtered.
Don't be a hog (don't be greedy."

.....continued.....

[Boiler20]

07:25 PM on 05/13/2009

So why else would one want a fixed or indexed annuity? In many states, annuity funds are creditor protected...consult your attorney on this, as the states all differ. The state of Florida has the most protective laws on creditor access to annuities. Why? First, there are so many seniors living there. Seniors that like their independence. What is the one biggest expression of that independence? Yes, the priviliege to drive a car.

/////////////////////////// WARNING: DO NOT use this post as personal advice. It is for educational purposes ONLY. You MUST consult your OWN licensed advisors in your state who can assess your own individual circumstance. Laws change all the time. //////////////////

Real life example: Joe, a 77 year old married retiree in Lakeland, FL (he's a Detroit Tigers fan, and the Tigers do spring training in Lakeland, where he's an usher at Joker Marchant Stadium for the games), has auto insurance and/or umbrella insurance that covers up to $1 million for any one accident. Joe turned down the annuity presentations he's seen over the last 15 years, scoffing at the surrender charges or what-not that he's read about in articles written by those that are ill-informed. Joe is involved in a multi-car accident, which is probably not his fault. Two weeks after the accident, he ignores all the solicitations from the chiropractors, personal injury attorneys, etc.,...as he wasn't hurt. But the other parties in the accident decide to answer.

.....continued.....

[Boiler20]

07:24 PM on 05/13/2009

Question, and disclosure: I am both insurance/annuity licensed and a fee-based investment advisor, so my only allegiance is to my client's best interests. So here's the question: How happy do you think the retirees and near retirees clients of mine are with some or even all of their retirement money into either a fixed or equity indexed annuity after the last 24 months? Yes, they have limited upside in any one year. And yes, their accounts are not down 30-55% as they would be in a large cap equity fund or etf, or a mix of 2/3rd fixed income and and 1/3rd equity or a balanced fund. Or, worse yet, the God-awful returns of the ultimate in non-accountability, the so-called 'lifestyle' or 'target date' funds.

IMO, all an equity indexed annuity does is smooth out returns. Vastly muting the up and down of the market's returns. We'd all like to think that EVERY investor is a PRUDENT investor, but it's simply not the case. Skeptical? Go out and ask 10 retirees or pre-retirees that do their own investing how their 401k or rollover has done the past 24 months. Maybe ONE will say they've avoided the carnage.

Or, this litmus test: Ask 10 investors in AIG fixed annuities or equity indexed annuities if they've lost even one penny. None of them have lost a penny. Nor will they. And it's NOT because Uncle Obama is propping up the parent company....

[ash711]

07:07 AM on 05/15/2009

WTF???? Is that Boiler20 or did you mean BoilerRoom 2.0. Equity Indexed Annunities a good investment??? What does Suzy Orman have to say about this, well she has a problem with the 5 to 10% commision you earn for peddling this SNAKE OIL. Yeah, you deserve to take a 5% commision for selling this trash. Yeah, $100,000 invested means at least $5000 for you for your hard days work. As to AIG, they deserved to GO BANKRUPT due to their recklessness in the derivatives market and would have and thus all your investors would have gotten pennies on the dollar but Congressional Democrats sold out taxpayers by bailout out AIG. Of course if our government worked for average Americans we wouldn't be paying off bets to banks like Goldman Sachs and Bank of America to the tune of 180 billion dollars. And the media drums up the the outrage about 180 million in bonuses while Goldman takes 13 billion from taxpayers for bullshit derivatives contracts. Thank you Hank Paulson and Timmy Geitner. Lets hope their is NO GOD CAUSE YOU MIGHT BE SCREWED. Karma, it is a b*tch.

[Boiler20]

04:47 AM on 05/16/2009

.....continued:

How do I add value and earn my fees? I use Point and Figure technical analysis (a method first used by Charles Dow, but which fell out of favor at the dawn of the computer age because it wasn't deemed 'modern') for a top down approach. Using this approach, which is free of investment banking relationships, the NYSE Bullish Percent indicated an extremely high level of risk in the US stock markets as a whole and specifically large cap stocks and funds back in the late fall of 2007. It was at this point that I hedged my clients' accounts by selling 50% of those assets, or purchasing long term S&P 500 put LEAPs options. In February of 2008, we sold or hedged the rest of this asset class, as well as went to all cash or cash and SP 500 put LEAPs.

On a $500,000 account, we avoided on average over $200,000 in losses. I think I earned my 1% advisory fee of $5,000, a 40-1 return, my fees for 20 years. Suffice it to say that my clients are pleased with my risk management services using this 'old fashioned' method/craft. As an advisor of the highest principles, they have rewarded me with literally hundreds of referrals over the past 15 years and I am proud to say that while I haven't been perfect those entire 15 years, the risk managment skills I've learned to implement over the last 10 years have served us well.