Alice, The Unsophisticated Investor 

Alice, my mother in law,  is blessed with a great memory and pretty good health for a woman of her age.  She works at it.  She’s been a widow for 6 years now.  Dad always handled their finances.  Since she’s been on her own, she relies on her two adult children and an accountant friend to guide her about her investments.  She was referred to a financial advisor known by a family member.  She thought things were fine until a year went by, the market was doing well and she had no gains at all in her portfolio. She’s comfortable, but not wealthy by most measures. There is enough to take care of her, though full time care would eat up a lot of what she has.  Luckily at this time, she is able to remain independent.

When She Discovered The Truth

Alice decided to change financial advisors.  It was then that she learned, to her dismay, that her other advisor had done something that really got her angry.  He had taken 10% of her investable assets and put them into a real estate investment trust (REIT) that could not be liquidated without a substantial financial penalty to her.  She is not savvy about complex investments and relies on others for advice.  She relied on her advisor a lot.  She is clear that she needs to watch out for herself.  She says the advisor never told her what he was doing with this investment and never explained that she would not be able to access the funds if she needed them unless she suffered a loss, in the form of a penalty.  He, of course says he told her all about it and she agreed. She doesn’t believe him.  My husband, Mikol, interviewed her about this and put it on YouTube.  Here’s what Alice has to say.

In the July 14, 2013 InvestmentNews, Dan Jamieson reported that the Financial Industry Regulatory Authority and the state regulator in MA are cracking down on exactly the kind of nontraditional, illiquid investment the financial advisor chose for Alice. Mr. Jamieson reports that In February, Massachusetts settled a case against LPL, which agreed to pay at least $2 million in restitution and $500,000 in fines related to the sale of nontraded REITs.

State regulators in Massachusetts settled their cases against five high profile firms who agreed to pay a total of $6.1 million in restitution to investors, and fines totaling $975,000.

State regulators aren’t the only ones cracking down on alternatives.
FINRA also warned members in 2012 in its annual exam priorities letter that it was “particularly concerned about sales practice abuses [and] yield-chasing behaviors” that might lead investors into unsuitable complex products.
Products under scrutiny by FINRA in 2013 included business development companies, structured products, nontraded REITs and private placements.
“Finra grinds us on structured notes and commodity-linked notes,” said the president of a broker-dealer organization, who asked not to be identified.

The regulators are reported to have found out that in the REIT cases, people didn’t know what they were investing in.  We think that is true for Alice.  We also think her advisor, knowing her lack of sophistication, took advantage of her for the sake of his commission.  His justification is that “she didn’t need the money” and that “she was investing for the benefit of her heirs”.  Her family, particularly her son, thinks that is rather arrogant of him.  How does he know whether she’ll live to be 100 and whether she will need the money?  Furthermore, Alice is not investing “for the benefit of her heirs” when she is relying on her funds to take care of her own needs for the rest of her life.

What We Did

As soon as we found out about the REIT sold to Alice, then 90, and how illiquid it was and for how long, we confronted the advisor with a letter and sent him a copy of the Investment News article.  He called shortly afterwards.  He tried to justify his actions, but was told very politely by my husband that Alice was to get full restitution or a FINRA complaint would be promptly filed.

Permission of various kinds had to be obtained. The advisor had left his firm and gone with a large bank. This messed things up for him for a time, but I thought he deserved it.  This was the threat of a claim. Two lawyers called and argued how great the investment was. We held our own and continued to insist on full restitution for Alice. More excuses.  Months of lawyering and letters later, she got full restitution.  You’ve never seen more butt-covering letters from them.

The lesson here is to be smarter than this guy was. It’s not that the investment itself was bad. It paid a decent return. It’s that at her age it was clearly unsuitable.  So keep the age of your client in mind and don’t make dumb assumptions like, “she didn’t need the money”.  That is a foolish statement for anyone to make about a 90 year old with a relatively modest portfolio who could need hundreds of thousands of dollars of care as some seniors do before the ends of their lives.

If you need private advice about any aging client whose behavior makes you question the client’s financial capacity for decisions, call us. We have the expertise to help you assess the client’s abillity and we can guide you.

Don’t wait for FINRA to come knocking.
Until next time,
Carolyn Rosenblatt, RN, Attorney, Mediator

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