March 25, 2023

Your Money: Four Signs That It’s Time to Find a New Broker

And so it is with the tale of Philip David Horn, the Wells Fargo broker who recently pleaded guilty to trading in clients’ accounts, canceling the trades and helping himself to the profits. He may very well end up in jail, just as soon as the federal judge can figure out how much money is at stake and how to make those clients whole.

All the juicy stuff is here, as my colleagues Jessica Silver-Greenberg and Susanne Craig laid out in a front-page article last month. There are the country club solicitations (and confrontations), the brokerage firm that finally figured out what was going on after more than two years and the chastened Mr. Horn putting 800 hours into volunteer work and begging the judge to keep him out of prison.

But on the other side of those trades were sophisticated clients, including a lawyer and retired pharmaceutical and aerospace executives. They didn’t notice what was going on, something that Wells Fargo’s lawyer pointed out four times in just a few minutes at a hearing last month in Los Angeles.

So should Mr. Horn’s clients have seen this coming? Perhaps not. But could they have? In hindsight, there were four signs that things weren’t quite right.

BROKER BRAGGING Mr. Horn reportedly bragged on the golf course about his trades and then pulled paper records out of the trunk of his car in the country club parking lot to back up his boasts.

This is objectively odd behavior. Pitches should take place in an office or at a meeting spot of a potential client’s choosing, over a sober deck of PowerPoint slides perhaps.

And if financial advisers are going toot their own horns about the good they’ve done for others, you should be hearing about how they persuaded clients not to sell all of their stocks in the first quarter of 2009 when stocks were at their nadir, even though they desperately wanted to. Or you should be hearing that the adviser regularly informs clients of perfectly legal tax-saving maneuvers that they never even knew about. And you should be looking for an emotionally intelligent counselor who can negotiate a truce between you and your spouse over spending disputes.

If brokers want to brag about past performance, however, ask them this: Can you show me audited, long-term results across every part of all of your clients’ portfolios? And can you guarantee that your good calls were related to skill and not luck?

BROKER TRADING The couple who suffered the most losses had multiple accounts with Mr. Horn, and their monthly statements, in aggregate, often ran more than 300 pages. Mr. Horn hid his in-and-out trading among all that verbiage.

Like it or not, if you’re putting your money in somebody else’s hands, you have the responsibility to read every line of your statements every month. People like Mr. Horn, who was a friend to many of his clients until he wasn’t, count on the fact that you won’t.

“I think the victims were picked because they weren’t paying attention to their accounts, because each and every trade was documented,” said Stephen Young, Wells Fargo’s outside counsel in this case, according to a court transcript of a sentencing hearing in January.

Then, if there is a lot of trading going on. you have the right to ask why. In a 1999 paper in the American Economic Review titled “Do Investors Trade Too Much?” Terrance Odean, now a professor the Haas School of Business at the University of California, Berkeley, answered in the affirmative.

His 1999 research, which examined a group of discount brokerage customers, found that on average the things investors buy actually underperform the things they held in the first place. Their returns are reduced through trading.

In a 2009 paper that Mr. Odean wrote with three others, the group tried to figure out exactly how much individual investors lose by trading. Using data from Taiwanese investors, they determined that the answer was a whopping 3.8 percentage point penalty annually on overall portfolio performance. In an e-mail this week, Mr. Odean said that he believed that these conclusions could be extended to brokers trading actively for their clients, though he has never studied this explicitly.

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You’re the Boss Blog: Hiring Outside Advisers Is as Important as Hiring Employees

Creating Value

Are you getting the most out of your business?

Jim Collins writes that one of the keys of successful companies is to have the right person in the right seat. I don’t think anyone would argue. But I do wonder why we don’t take the same care hiring outside advisers that we do with hiring employees.

As we saw in my recent series of posts on Holly Hunter’s efforts to sell her business, much of her pain came from hiring the wrong advisers. To review, Ms. Hunter hired a friend to represent her, hired a broker who claimed to represent both the buyer and the seller, and hired an attorney who didn’t have much experience in transactional work.

These sorts mistakes look glaring in retrospect, but they are not unusual. Many business owners make them, and not just when they are trying to sell their businesses. They can happen any time an owner hires someone from outside the company to provide advice and guidance.

If you own a business, you hire outside advisers. If  you own a small business, you may even outsource crucial functions. It’s one of the ways microbusinesses keep their employee headcount low. I spend a lot of time these days helping owners figure out how to make sure the right person is doing the right job.

First, it’s important to understand that the people who advise you bring their own worldviews. They have an expertise, and that expertise tends to color how they see things. Lawyers tend to look for legal solutions. Accountants look for tax-based solutions. It’s important to understand that and to think about what you are trying to accomplish. If you start with clarity about what you want to do and why, you give yourself an advantage.

Next, move on to how you’re going to get there and who needs to help. Having a system for hiring the right help is often the difference between success and failure. The first question to ask when hiring an outside adviser is, do you need a specialist or a generalist.

If the outcome you’re trying to accomplish is relatively straightforward, you probably need a specialist. But when things get complicated, such as if you are selling your business, you may benefit if you have either a specialist who can think globally or you a generalist who gets the big picture.

Next, I suggest you ask yourself a question: “What type of adviser do I work with most successfully?” You may have to do a little soul searching. I find that I’m most successful with advisers who share my view of how the world works. Do they need to be in control? Do they work well collaboratively? Do they listen well? I need to know the answers to these questions before I’m willing to sign on. The questions you need to answer will likely be different from mine.

Then, make sure the advisers you are considering have the technical skills you need. Make sure they are accustomed to facing the issues you’re facing. You might have to pay a little more, but in the end you will probably end up saving money, time and aggravation.

Along with technical ability, you want your advisers to demonstrate that they have been successful in achieving the type of outcomes you’re interested in. This means you must check references. Don’t just ask where they have been successful, ask them to describe a time things didn’t go well and what they learned.

Throughout the process of hiring and managing outside advisers, it is important to maintain control. This was part of the problem when Ms. Hunter hired a business broker. That broker represented both the buyer and the seller, and Ms. Hunter lost control of her adviser and her sale. (It didn’t work out very well for the buyer either.)

Make sure the adviser you hire understands why you hired him or her. Let this person know why the outcome is important to you. If you feel your adviser is taking you off course, it’s your responsibility to rein him or her back in.

Have you thought about how you hire advisers? What kind of success have you had? Do you think it makes sense to have a system? What advice would you add?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

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Bucks Blog: Advice for Avoiding Bad Investment Decisions

Paul Sullivan, in his Wealth Matters column this week, uses the fourth anniversary of the collapse of a string of investor frauds (including the biggest, the one involving Bernard L. Madoff) to offer some advice on avoiding similar frauds.

Other than the obvious advice — steer clear of funds whose returns seem to be too good to be true — the first step would be to determine if your adviser is honest. Paul mentions two Web sites, AdviceIQ and BrightScope, as sources of information about advisers. But perhaps the simplest piece of advice, from someone who has studied organizational behavior, is to ask yourself whether the investment is a bad idea. The time taken to answer the question may be enough to keep you from rushing into making a poor decision.

Assuming that you have made bad investment decisions, what have you learned from your mistakes? Please share your experiences below.

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Bucks Blog: A Measure of Protection, Just in Case

In his Wealth Matters column this week, Paul Sullivan talks about protecting your assets in case you’re sued. While he notes that you can never completely protect yourself, you can take steps to discourage people from pursuing you.

A big mistake that many people make, a wealth adviser told Paul, is that they assume the worst will never happen to them. But if nothing else, Hurricane Sandy — a storm that seemed to come out of nowhere — serves as a reminder that the worst can happen.

Tell us about your efforts to protect your assets for yourself or your heirs. What did you learn from the experience? And what advice can you offer to others?

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Bucks Blog: Ameriprise: Reviews from Customers and Advisers

My column this week is about Ameriprise, a company rich with history, though not always the good kind. It deserves a ton of credit for making financial planning central to its work with customers, but it has also run into plenty of trouble with regulators over the years.

Every company of its size is bound to have a few bad apples pushing products in the wrong way. Still, I remain wary of any financial planning operation where so many advisers earn money from commissions and the parent organization is in the life insurance and annuity business.

I still think that that you should work only with advisers who earn fees from money that you pay out of your own pocket or portfolio. That way, the adviser will not be tempted to recommend an investment that will bring in the most commission. And among the more than 10,000 Ameriprise advisers, there are some who work that way.

For those of you who have had dealings with the rest of them, I’d be curious to hear how you have fared, or if you’re an adviser but would never work with Ameriprise for whatever reason. Current and former advisers are welcome to weigh in, too.

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Wealth Matters: Wealthy Hesitate to Take a Break on Estate Taxes

But five months into the tax break, the people able to fully exploit it are more tentative than wealth advisers had expected. That could be a problem because this exemption, which will most likely be used to give money to children and grandchildren, is done through complicated structures that take up to a year to set up. (The exception, of course, is if someone simply dies. Then, the new estate tax exemptions of $5 million per person and a rate of 35 percent above that kick in.)

So why are the richest Americans hesitating to take advantage of this tax break? It comes down to two fears that bedevil everyone: they don’t want to put too much aside now in case they need it later, and they don’t want to take away their children’s incentive to work.

“Everyone is trying to capitalize on this two-year window because there is this ‘use it or lose it’ mentality and a need to plan wisely,” said Coventry Edwards-Pitt, senior wealth adviser at Ballentine Partners. “But the ideal answer from a tax mitigation standpoint is probably different from what most families can handle.”

While the changes to the estate tax might not produce a revenue windfall for the United States Treasury from people opting to pay the 35 percent gift tax, they could lead to a conversation that families at all levels of wealth rarely have: how do they want their lives, and by extension their wealth, to influence their children?

MONEY-MAKING OPPORTUNITIES By the end of 2010, many very wealthy couples had already given as much as $2 million in tax-free gifts, the previous limit. But the estimates of a gift of another $8 million, to hit the new $10 million limit, could be a windfall to heirs.

Lisa Featherngill, director of wealth planning at Wells Fargo Family Wealth, said an $8 million gift made to a “grantor dynasty trust” — a structure that allows the people making the gift to pay taxes on the capital gains during their lifetime — could grow to as much as $140 million over 40 years.

This potential growth is one of the reasons advisers say that few people are looking to exceed the exemption level. The other is that some feel the economy could weaken again and they might need their money.

Milo Zidek, who made his money in the reinsurance business, said he and his wife, both 76 and living in south Florida, would use the additional $8 million gift tax exemption to transfer money to their children and grandchildren.

“I doubt we’ll do more than that,” he said. “We’ve got to live. And you don’t want to overwhelm them.”

To that end, Mr. Zidek said, they would put the money in trust “because we don’t want them to become wild and crazy guys.” That, he said, was “improbable but nonetheless we want to keep their noses to the grindstone.”

DETERMINING STRATEGY Mr. Zidek’s concern is typical of what this window has prompted: will the rush to take advantage of a tax break turn heirs into trust-fund brats?

Advisers are counseling clients to spend significant time determining their intentions before they even think about the amount of the gift. “As a C.P.A., I can run through the numbers, but that doesn’t take into account the angst over the giving,” Ms. Featherngill said.

Once they have decided the family philosophy for their money, there is no shortage of ways to give far more than the $10 million a couple is now allowed to provide tax-free. Any private banker will reel off a list of obscurely named financial vehicles that will multiply the value of the gift.

Samuel V. Petrucci, director at Credit Suisse Private Bank, said he was working with an investment banker worth $75 million who was hesitant to put securities or cash into a trust for his children. Instead, he and his wife have decided to put a vacation home worth about $9 million into a trust that allows them to use the home until it passes on to their children.

“This client 100 percent understands why they should give $10 million,” Mr. Petrucci said. “To go from $75 million to $65 million doesn’t work for him. But in his mind, he is willing to part with the vacation home that he wants to keep in the family for a very long time.”

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