You have seen the headlines. Wall Street firms have paid billions of dollars of fines for cheating or defrauding investors. You may have disregarded the headlines because they did not impact you. But, the headlines are not the only risks that are created by Wall Street. There are other risks and there is a 75% probability one of them is impacting you.
These risks are created by deceptive sales practices that lower quality advisors use to sell investment and insurance products. Continue reading
Morgan Stanley CEO James Gorman had the partial fortitude to admit his firm belongs in the doghouse. Unfortunately, he also used two forms of standard Wall Street spin to dilute the impact of his comment when Bloomberg News quoted him saying, “Wall Street’s reputation will remain “in the doghouse” as long as trading scandals continue to plague the industry.” He went on to blame UBS for the latest scandal when he said, “The good works of the industry are ignored when some trader does some stupid thing like this guy at UBS did and goes to jail”.
Gorman is right about the doghouse. According to a Gallup poll last Summer, Americans’ confidence in U.S. banks fell to a record low of 21 percent; about half of what it was in 2007 before the Wall Street initiated crash in 2008. This was supported by Edelman Public Relations survey in January of this year that showed Financial Services & Banking were the least-trusted industries in America. Continue reading
If your answer is yes, you may be in serious financial trouble and not know it. Read on if your answer is no. You are about to learn some nasty tricks of the trade that have been engineered by Wall Street.
A high percentage of investors believe financial advisors have to tell the truth because they work in a regulated industry. It’s true, they are supposed to tell the truth, but there is no way the regulatory agencies (FINRA, SEC, State Securities and Insurance Commissioners) can protect you from unscrupulous advisors. Continue reading
My own experience will illustrate the problem. I attended an investor meeting with the head of our Chicago office. We both thought the meeting went extremely well. The investor asked thoughtful questions and we had good answers. We also had a very competitive track record and charged reasonable expenses for our knowledge, advice, and services.
The Chicago manager and I were both a little shocked when we were told the investor selected a money manager in Boston. He said the firm employed five Harvard MBAs, who were also CFAs, and their track record was 10% per year higher than ours. We had never heard of this money management firm before, but wrote it off as a loss and moved on.
About one year later, there was an article in the Wall Street Journal saying the SEC had shut this firm down. The owner of the company had made everything up: The staff, the credentials of the staff, the track record, and a glossy marketing brochure that even had photos of key staff surrounded by a lot of computers. Interestingly, the fake firm was on the approved lists of several wirehouses due to its enviable track record and exceptional staff. In two years, he had amassed $330 million of assets under management working out of a spare bedroom in his home. Continue reading
In a recent Investor Watchdog survey we uncovered an investor belief that could badly damage their financial interests. Investors did not believe they had a right to ask their current financial advisors specific types of questions.
Investors did not ask these questions for two primary reasons. First, they consider their advisors to be friends and friends do not ask friends certain types of questions. Second, they did not believe they had to ask questions because that was the responsibility of the regulatory agencies. If something flagrant happened, the advisor would be kicked out of the financial services industry. Both of these perceptions are wrong. Continue reading
You have seen the TV advertisements. Wall Street markets competence, trust, and services that help you achieve your financial goals. You have also seen the headlines documenting Wall Street abuses that have cost investors hundreds of billions of dollars. Which one do you believe, the ads or the headlines?
Wall Street is trustworthy or its not. I believe the headlines because regulatory agencies (SEC, FINRA, states) have documented one Wall Street abuse after another. When the most prestigious firms on Wall Street (Goldman Sachs, Citigroup) are ripping off investors you know the industry is not the trustworthy source of advice and information that its advertisements say it is. Continue reading
There are several regulators (SEC, FINRA, State Securities Commissioners) that audit financial advisory firms on a regular basis; for example every four or five years. The purpose of the audit is to make sure the firms and their representatives are following the rules. A second goal is to identify problems before they damage investors.
In addition to periodic audits, the regulatory agencies receive thousands of complaints per year from investors who believe they have been damaged by investment firms and their representatives. Many of the complaints are frivolous – that is, investors lost money in down markets and the representative did nothing wrong. But, at the other end of the spectrum is criminal wrongdoing. Continue reading
In the romantic comedy, Something’s Gotta Give, Jack Nicholson said to Diane Keaton, “I have always told you some version of the truth”. I believe the SEC is also telling the public some version of the truth.
The court system is currently reviewing a $285 million fine and settlement that was agreed to by the SEC and Citigroup when it sold toxic mortgage securities to investors. Citigroup told investors the mortgages were safe investments. Then the company bet money this mortgage pool would fail. If this sounds familiar, Goldman Sachs perpetrated the same scam. Citigroup made $160 million and investors lost hundreds of millions of dollars.
Judge Jed Rakoff rejected the settlement because it did not include an admission of wrongdoing by Citigroup. He wants this case to go to trial. The SEC and Citigroup are fighting his decision.
Why are the SEC and Citigroup on the same side? One should be the prosecutor and one should be the defendant.
In my opinion, the Rakoff decison interrupted a long running scam that damages the public. It is somehow legal for financial service companies to rip-off investors. If they are caught, they are allowed to pay a fine without admitting guilt. Because they do not admit guilt, no crime was committed.
This travesty of justice has two consequences. First, fines are a cost of doing business for companies and most of the fines are offset by profits that were generated by the scams. Second, no company executives are prosecuted for committing fraud. These are the executives at Citigroup who approved the sale of toxic assets and then bet the mortgage product would decline in value. This fraud was committed by high level executives at Citigroup.
The SEC is telling investors some version of the truth when it says the public interest is being served by the payment of fines. If that was true, why aren’t the fines more of a deterrent? The real truth is executives are using company resources to stay out of jail and the SEC lets the get away with it.
The financial services industry has three primary agencies that regulate its activities: SEC (Registered Investment Advisors), FINRA (Broker/Dealers, Stockbrokers), State Securities Commissioners (Both). The agencies employ thousands of examiners who are responsible for making sure financial service firms follow the rules when they sell investment products and services.
The focus of the agencies is auditing the records and business practices of firms and advisors looking for deceptive sales tactics, fraudulent business practices, and illegal scams. Depending on the type of transgression, the guilty parties are fined, kicked out of the industry, or jailed.
Audits have some deterrent value, but they miss the mark if the goal is to protect investors from unethical advisors and firms. They uncover scams after investor assets are long gone. What investors really need are services that prevent the scams from happening in the first place – when their assets are still intact.
Obama wants to expand the SEC’s budget by a few hundred million dollars so it can increase the frequency of financial advisory firm audits and expand other oversight functions. This sounds more like political posturing than a real solution to a major problem.
Auditors find problems after the money is long gone. What investors really need is a solution that prevents the money from disappearing in the first place.
One low cost solution would be to require full transparency by financial advisors and the firms they work for. Then provide an easy, free way for investors to validate the accuracy of information that is provided to them by advisors.
This will not happen. Wall Street spends millions on lobbyists fighting regulations that would mandate full transparency. There is a lot of information Wall Street does not want investors to have – for example, information that exposes deceptive sales practices. Bad advisors and scam artists will continue to flourish as long as Wall Street is successful withholding information from investors.
Keep in mind, the SEC and FINRA let this happen. What are your thoughts?