Joanne Bohnke is a 74 year old widow, hoping to make her $315,000 savings last longer than she does. She turned for advice, as most Americans unfortunately do, to her broker at Smith Barney (now Morgan Stanley Smith Barney), in Chico, California where she was residing at the time.
Ms. Bohnke explained that she could not afford any meaningful risk. She was retired and her nest egg was all she had to sustain her in her golden years.
Her trusted broker knew exactly the right investment for 46% of her assets: GM preferred stock. According to Ms. Bohnke's lawyer, David Valicenti, at the time her broker made this recommendation, GM preferred shares were rated just above "junk" status.
Subsequently, the stock plummeted in value. Ms. Bohnke lost 76% of her investment.
Ms. Bohnke had only one avenue of redress: Arbitration administered by the Financial Industry Regulatory Authority (FINRA). When she opened her account with Smith Barney she gave up her constitutional right to access to the courts and trial by jury. FINRA is basically a trade association for the securities industry, which ironically claims on its web site that it "...protects the most important investor in the world. You."
The reality is the mandatory arbitration system is seriously flawed and rigged against investors like Ms. Bohnke. William Galvin, the highly respected Secretary of the Commonwealth of Massachusetts testified that FINRA's mandatory arbitration system is "an industry sponsored damage-containment and control program masquerading as juridical proceeding."
Only about 45% of awards issued by FINRA arbitration panels are in favor of investors, and many of those are for a fraction of the losses claimed. FINRA likes to note that many cases are settled, but omits the fact that those settlements are often for a small percentage of the losses, because investors are well aware of their slim chances of success before these industry oriented arbitrators.
Here's the miracle:
Ms. Bohnke's case was apparently so indefensible that even a FINRA arbitration panel couldn't find a way to avoid holding her broker responsible. It awarded her $101,000 for her losses and $35,112 in attorneys' fees and costs.
The fact that Smith Barney refused to settle and forced Ms. Bohnke to go through a hearing is telling. The securities industry knows these hearings are not a level playing field. They are willing to take their chances even in the most egregious cases. A risk averse elderly client with a small nest egg should have been invested in a globally diversified portfolio of low cost index funds, with no more than 15% of her funds exposed to stock market risk. The bond portion her portfolio should have been placed in a broadly diversified bond index fund, like the Vanguard Total Bond Index Fund (VBMFX). Only a brokerage firm could (with a straight face) justify investing her "risk-free" funds in the volatile preferred stock of one company.
The conduct of the Smith Barney broker is not atypical. It's one of many reasons why savvy investors should not rely on brokers for advice. If bad advice from your broker has caused losses in your account, don't expect the same result that Ms. Bohnke received.
Hoping for miracles is not a sound investing strategy.
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Pamela Rosenau: Why I'm Not Buying Banks
Ummmm, that it makes it investment grade. The broker did not steer her into something that was deemed risky by the rating agencies. He just invested too much in one palce.
also, it is a bit ironic that pensions of union workers which were saved is what cost Ms. Bohnke her own investment, I don't see that relationship mentioned here.
We had complained for almost 2 years to the SEC that Billions of shares of stock were being created each quarter handed out as Stock Options and sold.
The SEC should have been asking how they could be creating all this thousands of extra shares of stock just before each quarterly report. Many of us watched as Executives all over the USA were cashing out of these Corporations. We got out too.
IMPO........It's not a good strategy for voting either, but we seem to be denied a viable option by a system bought and paid for by big business.
I love how they just ignore it until it goes away. Maybe HuffPo needs another icon at the top of page where you can reference articles from Big Financial before you make a mistake and go to one...
http://yieldpig.blogspot.com/
"a happy coincidence". "A HAPPY COINCIDENCE"......... This is one of the reasons I use discount brokers with the lowest commissions and never take or listen to advice from industy insiders - they all lie.
The best free advice out there for the average person can usually be found on Mutual Fund websites. Their fees are 90% less and you can sleep at night.
So why should Americans invest in business? Business has made their own unfriendly climate. Brokers purposely giving bad advice to clients, business faking their balance sheets, Moody purposly giving triple A ratings knowling they were false. If business is having a hard time - they created their hard time all at the expense of the American middle class taxpayer.
After my aunt died, the trust said they wanted to grow the fund. It didn't, it stayed constant, from 1989 to 1996, while the market doubled. The fund trustees bought and sold shares, seemingly at random. My sister and her husband went to a lawyer. He faced off with the trust fund, but advised that breaking the trust would take all its money. The bank trustees would have been by a suit against them. A compromise was set up, my sister now gets a monthly stipend, but has no control. This was not what my aunt really wanted.
My youngest aunt sold her house, receiving $200,000. I advised her to put the money in CDs. She said she would talk to her bank adviser, he would "know what to do". He did, he put her in an annuity, she was 89 at the time. Now she is in an old age facility, but she can't access her funds for her monthly expenses.
If I get much older, I will have a younger relative with me when I meet with the jackals who pretend to be financial advisers with my interests at stakes. As long as they make a big profit.
Your agreement to forego legal procedure in favor of arbitration ... is part of a contract. Nothing more or less.
If you can make the case that the other party in the contract is "with malice aforethought" acting against ordinary "fiduciary duty" with regard to you, any contract can be annulled. You would have had a fight on your hands, and perhaps your attorney's advice to you was indeed the best option for you in your situation.
A contract can stipulate arbitration... for obvious reasons. But the bright-line still stands unmoved: if the other party has committed a TORT against you, and you can (and are willing to) make a judge-and-jury agree with you, "all bets are off."