After a couple of workshops and several meetings with attendees, my disillusionment with the financial advice industry continues. In fact, after spending some time with a couple of people and their portfolios, my disdain for those who sell financial products may have grown to new heights. What I saw, and heard, from these people was nothing short of appalling.
The case I would like to share with you in this column was, by far, the most horrific example of irresponsible investment counseling that I have seen in many years. A lovely 83-year-old woman decided to invest with one of the better known financial radio “personalities” in the Phoenix area. This man works for one of the largest investment firms in the country and with 35 years of “experience,” represents to be a responsible money manager to this radio listener.
So, a couple of years ago, she entrusted a large percentage of her liquid capital to this particular broker to invest on her behalf. Now, bear in mind that this financial salesman has long been concerned about the future of the stock market and fancies himself to be one who can predict the financial future.
A little background on our investor. As I said, she is an 83-year old widow. She recently lost several hundred thousand dollars in a bad Phoenix real estate investment (in good company) and has been influenced to make several other bad investment decisions. What this less than savvy investor needed was some help creating a long-term investment portfolio.
Any advisor worth his or her salt would have tried to help the client create a relatively conservative portfolio. The broker with whom she dealt had a different idea. Fervently believing that the stock market was doomed, he asked for (and received) full trading discretion (something you should never give) and placed all of her money on a fee-based managed account with his firm for which she charged 3% annually, although he only received 1%.
Instead of placing the money in a portfolio of stocks and/or bonds, or even stock or bond mutual funds, he proceeded to put a large portion of the money into some of the most dangerous of speculative investments, short-selling ETFs (exchange traded funds). This is a product that does well when the market goes down, but experiences massive losses in a rising market.
Ever since he made these bad market bets, stocks have generally risen dramatically. Straight “short” products have done badly enough, but the funds in which this senior citizen invested weren’t your typical short funds. No, he wanted to give her more bang for her investment (speculative) buck. Why take a little risk when you can really pile it on? You know what they say; no guts, no glory?
Completely confident in his predictive prowess, he decided to really amplify the potential return (and the possible losses) by placing her money in what are called “double short” funds. These portfolios borrow money to take a more aggressive position. TheStreet.com described double short ETFs as a product designed to “draw people looking to make big bets on market direction for short periods of time.” Nowhere can I find a responsible third party who refers to any short selling product as a somewhat safe or reasonable investment for anyone, let alone a 83-year old widow.
It is impossible to know everything that transpired between the “advisor” and the client. It is likely that the salesman will claim that his client requested a speculative vehicle. While that is possible, someone acting as a fiduciary would never allow a client in her position to put money into anything that acts as little more than a gambling vehicle.
The only “silver-lining” to this story is the fact that she realized the mistakes that were made and is now looking for a real investment program. I just hope that she will end up in a massively diversified portfolio of equities and high-quality U.S. government bonds, no matter who she eventually chooses to hire.