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Some of my best article ideas come from my readers, and this week is
no exception. This is a story of misplaced trust, dishonesty,
inaction and great financial loss. The lessons learned through their
experience will hopefully save you from a similar fate. Read on to
find out more.
Bill and his wife, Jane, (not their real names), were a
well-educated couple looking to boost their returns. After attending
one broker's seminar, Bill was impressed by, his expertise in
company analysis and stop-loss protection.
They decided to put Jane's retirement money into this broker's
hands. But after signing the paperwork to open the account, the
broker never contacted Jane to find out how she wanted her money
managed. Both sides made assumptions about what the other wanted
and/or would do.
Jane and Bill were busy, and so was Jane's IRA. We don't know how
long it took or how the account did early on, but eventually, over
90% of Jane's retirement money went down the tubes.
The broker promised stop-loss protection but never actually put that
strategy in place. The broker determined Jane's risk tolerance
without any input from her. When that section of the application was
left blank, the broker filled it in it himself so that it, according
to Bill, would justify his stock picking and mutual fund selection.
Bill and Jane had to go through arbitration in an attempt to recover
their losses, as are almost all brokerage firm clients. After a
process that typically takes several years, the panel agreed that
the broker had violated 26 NASD regulations. These included lying,
the use of erroneous information, total mismanagement of client's
accounts and the use of unsuitable investments.
When it was all over, guess who the panel found at fault for Jane's
losses?
Jane, of course! They reasoned that since she was a well-educated
woman, with a Master's degree no less, that she should have known
better than to let it happen. Her husband Bill was even chastised
for finding the broker in the first place, and for putting her in a
position to lose her money. "We were supposed to know better, not
the broker, or his broker-dealer. I am not making this up. My wife
got a check for less than 1% of the account value before the losses
occurred."
Bill's experience with arbitration is fairly typical. Roughly 50% of
arbitration cases are won by the investor, but the award is often a
fraction of the damages. Moreover, many times the complaint doesn't
even show on the broker's record.
This story has many lessons. Perhaps the most important one is that
you bear the primary responsibility for managing your investments.
The financial system isn't out to protect the individual investor.
Even if you suffer great financial loss, don't expect the system to
bail you out.
Bill's story also illustrates the need for investors to have
transparent communication with their advisor. If you don't like the
investments being used or if you aren't comfortable with the
portfolio allocation then let the advisor know.
Don't just assume that your account is doing fine. Watch your
monthly statements. Track your portfolio's value. If the value
starts to decline significantly and you aren't assured the advisor
is taking action to protect it, then find out why. If you don't like
the advisor's response, then take your account elsewhere.
Also keep in mind that you won't know if any advisor is right for
you until after you've worked with him/her for about a year. If you
find yourself laying awake at night worried about your money,
though, it's a sure sign that something is wrong.
The bottom line: it's better to prevent significant losses from
occurring in the first place instead of trying to recover them
through arbitration later. Determine the risk you are willing to
assume. If your account value drops to that level then demand that
action be taken. You are the boss.
The buck stops with you. You can delegate the day-to-day management
and investment selection to a trusted advisor, but it is your
responsibility to manage that relationship. Think of yourself as a
business owner. If you didn't like the job an employee was doing
you'd fire him/her. Take the same approach with your advisor.
Remember, it's YOUR money.
I'll personally respond to your questions, free of charge. Go to
http://www.guardingyourwealth.com and click on
"Ask Jeff."
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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