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Representing Individual, High Net Worth & Institutional Investors

Office in Indiana


Home > Blog > Monthly Archives: April 2013

Monthly Archives: April 2013

Tips to Consider When Choosing a Financial Adviser

Choosing a financial adviser is a big deal. These individuals are responsible for giving you advice about how to save, invest, and grow your money. A good financial adviser can put you on the path to a solid financial future, while others may steer you in the wrong direction.

As with anything that relates to your investments, it’s important to thoroughly do your homework so that you choose a financial planner who is right for you and your financial future.

Anyone can advertise themselves as a financial adviser.  But simply saying you are a financial adviser doesn’t make you a legitimate expert. One of the most reliable credentials to look for is the CFP designation (which stands for certified financial planner). CFP means a person has successfully passed a rigorous test administered by the Certified Financial Planner Board of Standards.

Other tips to consider when choosing a financial planner is to ask about the adviser’s pay structure.  In most cases, investors should avoid commission-based only advisers because these individuals may not always have a client’s best interests at heart. Rather, some may push certain financial products that benefit them via hefty commissions.

Conduct personal interviews with three or four prospective financial planners. Have a list of questions ready, including inquiries about the adviser’s investing philosophy. Be sure to ask  if the adviser has ever faced an investigation by regulatory groups such as the Financial Industry Regulatory Authority or the Securities and Exchange Commission (SEC). You can check the compliance record of advisers and firms here.  Also, ask for references of current clients whose investment goals are similar to yours.

Be on the lookout for red flags. This includes marketing hype by advisers who tout so-called investment guarantees. No one can make a guarantee when it comes to investments. Every investment contains some level of risk. If a financial adviser says he or she can outperform the market each and every time with a particular investment, it’s probably best to walk away.

The SEC offers several resources and additional questions to ask about selecting financial advisers. You can view that information here.

Brokers Who Gamble With Your Retirement Savings

A PBS documentary had harsh words for financial advisers, blaming them for many of the struggles facing Americans today as try to save for their retirement. In The Retirement Gamble, Frontline correspondent Martin Smith investigates what happened to retirement in America and the role that financial services companies may be playing in draining your savings year after year.

Among other things, producers of The Retirement Gamble cite fees that financial advisers charge investors in their 401(k)s – largely made up of mutual fund fees and commissions – as one of the biggest obstacles behind the retirement savings crisis.

The documentary also criticizes advisers for boosting their own income by steering investors into high-fee investments like actively managed mutual funds. In an April 24 article by Investment News, Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, says the term “financial adviser” means almost nothing in today’s investing world. “It could be a financial planner,” she says in the article. “Or it could be a broker who is a salesman.”

Indeed, a recent AARP study showed that 70% of mutual fund savers were unaware that they were paying any fees at all.

Teresa Ghilarducci, an economist at The New School, was equally condemning of financial services representatives and their firms. “Basically, your guy is out for himself to maximize his sales, and the way he does it is to be loyal to the mutual fund,” she said in the documentary. “They try to sell you the most profitable products.”

More on The Retirement Gamble can be found here.

SEC’s Gallagher Remains Steadfast to Muni ‘Armageddon’ Comment

Daniel M. Gallagher, a member of the Securities and Exchange Commission (SEC), is not backing down from recent comments regarding what he called “Armageddon risks” in the municipal bond market.

“I made the comment in the context of credit risk plus interest rate risk being two major factors that maybe investors don’t fully understand,” Gallagher said in an April 23 article by Investment News. “The population of investors in this space means we have to double down on investor education.”

Gallagher made the Armageddon reference last week at a round-table discussion sponsored by the SEC on fixed-income markets. Specifically, Gallagher stated that combining rising rates with the recent California muni bankruptcies could translate into potential “Armageddon.”

What concerns Gallagher, as well as others, is the trend of credit quality in the municipal bond arena, combined with an environment in which rates can only go up and thus drive down the value of existing bonds.

CFPB Offers Recommendations to Protect Seniors From Fraud

Senior citizens are twice as likely as younger Americans to become victims of financial fraud. According to AARP, individuals 60 years of age and older account for 15% of the U.S. population, but represent one-third of all financial fraud victims.

These statistics are even more alarming given the fact that older investors often rely heavily on their financial advisers to invest their money and plan for their retirement years. And many investors put more trust and faith into those financial advisers with “senior designations” because they believe this certification means the adviser is uniquely qualified to market, sell or give advice about certain financial products.

But that is not always the case, says a new report from the Consumer Financial Protection Bureau. Financial advisers can use some 50 senior financial designations to tout various financial products, and not all of these senior designations require expertise or rigorous training. This can be confusing to seniors and make them vulnerable to potential fraud or abuse, says the CFPB.

“Not all financial professionals with titles like ‘retirement adviser’ and ‘senior specialist’ are qualified to help you manage your money,” says Skip Humphrey, head of the Office of Financial Protection for Older Americans, which is part of the Consumer Financial Protection Bureau. “Most financial advisers are well trained reputable professionals. But credentials alone don’t guarantee expertise or the quality of someone’s training.”

The CFPB’s report offers several recommendations to help state and federal regulators better protect seniors from potential investment fraud. Among them:  Create a centralized tool for consumers to research and verify senior designations; SEC tracking of complaints related to senior designations; mandatory disclosures by individuals who claim expertise specific to seniors; and a requirement that holders of senior designations meet and maintain minimum levels of professional standards, including education, accreditation and a minimum standard of conduct.

In the interim, investors of all ages are wise to always be on the lookout for possible red flags when it comes to their investments, including:

  • Overly consistent or unusually high returns. All investments carry some amount of risk. The bottom line:  If it sounds too good to be true, it probably is.
  • Hard-to-understand investing strategies.  Legitimate financial advisers will take time to thoroughly explain your investments to you and answer any questions that you may have.
  • High-pressure sales tactics. Reputable financial professionals will not pressure you to purchase a certain financial product or approach you with an investment whose “window of opportunity” is calls for an immediate decision.
  • Guarantees. In the investing world, there are no guarantees. Period. Every investment has some potential risk.

The CFPB report, which you can read in its entirety here, was issued under a mandate from The Dodd-Frank Consumer Protection Act.

SEC’s Luis Aguilar: End Mandatory Arbitration Clauses

Earlier this week, state securities regulators made an appearance on Capitol Hill in an effort to gain support among lawmakers for restricting or ending the use of mandatory arbitration clauses in client contracts with brokers. As reported April 17 by Investment News, one person who needs no convincing on the matter is Securities and Exchange Commissioner (SEC) Luis Aguilar.

During a speech at the North American Securities Administrators Association conference on Tuesday, Aguilar called for an end to mandatory arbitration, saying that he believes the SEC needs to be “proactive” in this important area.

“We need to support investor choice. Allowing investors to take their legal claims to court would “enhance investor protection and add more teeth to our federal securities laws,” Aguilar told the audience.

The same message ­- that investors should be allowed to go to court to settle a grievance against their broker – was reiterated by about 17 NASAA members when they recently met with more than 40 lawmakers.

The Dodd-Frank financial reform law authorizes the SEC to prohibit or curtail compulsory arbitration for clients of brokers and investment advisers. So far, the SEC has not yet addressed the arbitration provision.

“The time is ripe for the commission to act under [Dodd-Frank] to protect the investing public and prevent the further abuse of forced arbitration contracts. This is at the forefront of our agenda,” said Bob Webster, NASAA spokesman, in the Investment News story.

The issue of compulsory arbitration came to a head earlier this year following a ruling by a FINRA arbitration panel who said that they could not stop Charles Schwab Corp. from using the arbitration agreements to prohibit clients from engaging in class actions.

Arbitration backers say that the process is more efficient and less costly than a court proceeding. Opponents argue that class actions provide a better venue than arbitration for disputes involving a small amount of money. The SEC’s Aguilar noted in his speech on Tuesday that clients should not to be forced to give up their access to judicial redress.

“Investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisers,” Aguilar said. “A client’s right to go to court to recover monetary damages is an important right that should be preserved and kept in the client’s toolkit.”


Sales Practices to Elderly Under FINRA’s Radar

Regulators are taking a much closer look at the sales practices of brokers and firms involving high-risk investments targeting seniors. As reported April 14 by Investment News, the Financial Industry Regulatory Authority (FINRA) currently is gathering data from firms regarding the products they market to seniors, the percentage of revenue they derive from those sales and the designations they are using to market themselves to older Americans.

Elderly individuals are especially vulnerable to offers of yield-chasing and high-risk products, says FINRA chief executive Richard G. Ketchum.

“These are people who have been particularly impacted by reductions in interest rates because the cash coming from their investments often is a significant supplement to whatever 401(k), pensions and Social Security they have,” he said in the Investment News story.

During a compliance conference held last week at the Securities and Exchange Commission (SEC), panel participant Mercer Bullard, president of Fund Democracy and professor of law at the University of Mississippi, predicted that the United States is facing what he calls a “senior crisis” posed by the risk of seniors’ outliving their assets and their declining ability to manage their money.

“What we’re looking at is a massive increase in senior misery,” Bullard told the audience.

Bullard attributes some of the reasons behind this senior crisis to the increasing sophistication and complexity of today’s financial products and investments.

“There’s probably someday going to be a good argument that anyone over 75 shouldn’t be sold anything that is outside of a predetermined list of fairly simple funds, meaning low volatility and low risk,” he said in the Investment News story. “Otherwise, we’re going to see millions of seniors living on Social Security who are not expecting that to be their standard of living.”

Battle Emerging Between Tony Thompson & REIT Board

Real estate powerhouse Tony Thompson and the independent directors of a non-traded real estate investment trust are going head to head over why the dividend of the TNP Strategic Retail Trust was cut last month and what the management of the REIT is going to be moving forward.

As reported April 12 by Investment News, Thompson is known among independent broker/dealers for his role as a leading seller of tenant in common 1031 exchanges before the real estate crash of 2007-08.

Earlier this year, Thompson and the broker/dealer manager of the TNP Strategic Retail Trust, TNP Securities LLC, found themselves at the center of an investigation by the Financial Industry Regulatory Authority (FINRA) for failing to deliver documents in a FINRA inquiry.

In a letter to investors dated March 27, Thompson, who is chairman and co-chief executive of the TNP Strategic Retail Trust, said the three independent directors on the board, Jeffrey Rogers, Phillip Levin and John Maier, “voted to not pay [first] quarter 2013 dividends. I opposed this decision and was not part of the board meeting.”

According to the Investment News article, Thompson stated in the letter – which was not filed with the Securities and Exchange Commission (SEC) – that the distribution cut was the result of the directors inflating expenses.

“I believe extraordinary expenses are one of the primary causes for the independent directors’ decision not to pay a current distribution,” Thompson wrote. “These expenses include attorney fees related to the independent directors’ ‘special committee’ activities, the special committee’s director fees, default interest” and other costs, including salaries of accountants.

The board has since filed a shareholder letter with the SEC refuting Thompson’s assessment and that his letter was riddled with errors, including the actual number of properties owned by the REIT.

The board also is trying to fire as the REIT’s manager another company controlled by Thompson, TNP Strategic Retail Advisers LLC, and find a new adviser.



Wells Fargo and Medical Capital Holdings Case to Move Forward

Earlier this week, a federal judge rejected an attempt by Wells Fargo & Co. to throw out a class action lawsuit brought by investors who say the bank failed in its role as a trustee for debt issued by Medical Capital Holdings. The decision by Judge David Carter of the U.S. District Court for the Central District of California clears the way for a possible trial against Wells Fargo and its involvement with Medical Capital.

As reported April 3 by Reuters, investors allege that Wells Fargo was supposed to disburse money so that Medical Capital could offer financing to medical care providers by purchasing their outstanding receivables. Instead, investors contend Wells Fargo failed to stop Medical Capital from diverting investors’ money to such items as non-medical projects and excessive administrative fees.

In July 2009, Medical Capital, a medical-receivables company, collapsed after the Securities and Exchange Commission (SEC) charged it with fraud. At that time, Medical Capital had issued close to $2.2 billion in private-placement notes.  A court-appointed receiver later found that investors lost between $839 million and $1.08 billion through Med Cap’s use of a “Ponzi-like scheme” to extract excess fees from investors.

Joseph Lampariello, Medical Capital’s former president, pleaded guilty last year to criminal wire fraud related to the alleged scheme. He has yet to be sentenced.

In February, the Bank of New York Mellon, another Medical Capital trustee, agreed to pay $114 million to investors.

The cases are all in the U.S. District Court, Central District of California. The master case is Medical Capital Securities Litigation, No. 10-ml-02145. The Wells Fargo cases are Masonek et al v. Wells Fargo Bank et al, No. 09-1048; Bain et al v. Wells Fargo Bank et al, No. 10-0548; and Abbate et al v. Wells Fargo Bank et al, No. 10-06561.


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