January 21, 2021

Your Money: Signs That It’s Time for 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 Braemar Country Club golf course in Tarzana, Calif., 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 to 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.

Twitter: @ronlieber

Article source: http://www.nytimes.com/2013/02/02/your-money/four-signs-that-its-time-to-find-a-new-broker.html?partner=rss&emc=rss

Prescriptions: Health Insurers Keep Reporting Robust Profits

UnitedHealth Group, one of the nation’s largest health insurers, reported its second-quarter results on Tuesday, and the good news for the industry looked as if it was likely to continue.

The company announced a double-digit increase in profits and raised its estimates for what it thought it would make for 2011, according to the company’s news release.

Once again, the high profits of the insurers appear to be partly the result of more budget-consciousness by their customers, even as the insurers ask for higher premiums. Many Americans seem to be putting off or forgoing medical care because of the weak economy and the increasing amount they are required to pay in medical bills as their deductibles and co-payments climb, as I wrote in a front-page article in May.

At the time, many health insurers insisted it was too soon to tell whether utilization would eventually rebound to the same levels as before the economic downturn. They argued that they could not count on the demand for medical care staying at relatively low levels.

Even now, UnitedHealth executives say they expect people to start using health services much more the way they did before the recession than they are currently. “We expect pressure on UnitedHealthcare’s gross margin percentage in the second half of 2011 and into 2012, due to increasing rate pressure from government customers and more overall normal utilization trends,” UnitedHealth’s chief executive, Stephen J. Hemsley, told analysts and investors.

Are the insurers right? Do you think once the economy rebounds people will be as quick to agree to a costly medical test or procedure? Will they start going to the doctor more? Or have high deductibles and co-payments changed the way people think about medical care?

Article source: http://feeds.nytimes.com/click.phdo?i=0acaba22154e2743432e1910e5349546