But Where Are The Investor’s Yachts?
IRS Motto: "We’re not happy until you’re not happy."
Rita, a newly widowed mother supporting her two school-age children entrusted more that $500,000 of her savings and husband's life insurance to stockbroker Karen, according to a news article which ran in the Orlando Sentinel. (Not their real names)
It seemed like a sure bet. After all, Karen was a vice president at one of the more prestigious national firms. She had a big, plush corner office with a wall of glass looking out on Winter Park, a huge desk and two assistants. In fact, her office nickname was even “Superstar.”
It was obvious that Karen was indeed very successful. She was making more that $700,000 a year, bought a four-bedroom Mediterranean-style house with a pool on a Winter Park golf course for $750,000 and had received a $1 million signing bonus for moving to her current investment firm.
The Problem
There was just one problem. Although she became rich practicing her sales craft, Karen had never learned much about managing investment portfolios. “I had no training,” she said during an Orlando Sentinel interview at her home. “I was just fortunate that the stock market was going straight up .... I did not know what to do in a bear market.”
According to Karen the national firms for which she worked did indeed give her training but not on money management, the emphasis was on sales. Karen maintains she never received more than the most superficial training in money management, but instead was taught mostly how to cold call clients.
Even Karen’s previous work experience was of no help in shaping stock portfolios. She had worked as a home security system salesperson, then in wholesale liquor sales, then bread sales to restaurants and eventually started her own company selling custom closets. The common denominator all being sales.
The Damage
Rita, the widow, watched as her account lost $60,000 in her first month with Karen. By spring, her $500,000 nest egg was down to $200,000. And, she wasn’t the only casualty. The financial losses of Karen’s client’s threaten to exceed $30 million. Many of Karen’s former customers are now headed to arbitration, asking for $50 million in losses and triple punitive damages. Even Karen’s father received a $250,000 settlement from her broker.
The Lesson
1. Don’t be fooled by prestigious trappings. Someone is paying for the luxury and wealth you are seeing — the customers!
2. Don’t believe outrageous claims. Karen was promising her clients annual returns of between 48 to 64 percent. If it sounds too good to be true, it usually is.
3. Don’t be fooled by fancy titles. Karen held the title of “vice president, investments”. This deepened her credibility, but what many clients may not know is that brokerages hand out vice president titles the way some companies pass out parking permits.
4. Ask about your investment advisor’s formal education, experience and credentials. A Certified Financial Planner has formal education not only in investments, but tax planning, estate planning, retirement planning and insurance/risk assessment.
5. Finally, develop a reasonable investment plan and stick to it. According to Karen, her broker taught her to sell “the stock of the day or the mutual fund of the day.”
By, the way, Karen still maintains she could have been a “great stockbroker.” And she said, she would like to get back into the financial-services business.
It kind of reminds me of an old proverb, “Fool me once, shame on you. Fool me twice, shame on me.”
Invitation
If you’re not a client yet, and you’d like to explore the option of developing a professionally managed investment portfolio comprised of no-load mutual funds, please give me a call.
I’d be happy to sit down with you and explain how as a fee-only investment advisor I can assist you in meeting your financial goals.
Marshall Sitarik – CFP
Ph. 407-977-3800