Investors Lose Millions to Advisor Fraud
A recent case highlights how trusting the wrong financial advisor can lead to devastating losses, with one couple reporting between $80,000 and $150,000 in lost savings due to fraudulent practices. This situation, which began to unravel after a market reset in 2016, is a stark warning for investors about the importance of due diligence when choosing financial professionals.
The Search for a Trusted Advisor
The couple, seeking to secure their retirement, interviewed several financial advisors. They were initially drawn to a firm that presented itself as a family operation with young, energetic advisors.
The advisors reportedly “oversold” their credentials and brochures, creating an impression of competence and trustworthiness. The couple believed these advisors would consider their personal risk tolerance and offer balanced investment strategies.
When Investments Went Sideways
However, the reality of their investments quickly diverged from expectations. As the stock market began to recover around the time Donald Trump took office, the couple’s friends were reporting gains of 8% to 10% or more.
In contrast, the couple’s own investments were stagnant, yielding only 3% to 4%, and sometimes even negative returns. This significant underperformance prompted the couple to investigate further, as the situation simply “didn’t feel right.”
Uncovering Fraudulent Practices
Deciding to withdraw their funds, the couple contacted a FINRA (Financial Industry Regulatory Authority) attorney. A review of their account statements revealed serious misconduct.
The attorney found evidence of churning, forged signatures, and investments in penny stocks. The advisor had allegedly altered the couple’s risk profile and invested in complex financial products like inverse Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs), which the couple had no understanding of.
Legal Recourse and Significant Losses
Following these discoveries, the advisor’s misconduct was reported. The advisor subsequently lost his license. While the couple was not able to participate in a larger class-action lawsuit involving ten individuals from the same firm, that lawsuit sought a minimum of $2.6 million in damages.
The couple’s attorney estimated their personal losses to be between $80,000 and $150,000. They also acknowledged the significant “opportunity cost” – the money that could have been working for them but was instead lost or tied up in fraudulent schemes.
The couple pulled their money out in 2019. Calculating the exact loss proved difficult due to the extensive churning.
At one point, transactions totaling around $300,000 passed through their account, an amount far exceeding their available funds. As the first to withdraw their money, they bore the brunt of the immediate financial impact, leaving them feeling reserved about discussing their experience.
Market Impact and What Investors Should Know
This case highlights the critical need for investors to thoroughly vet their financial advisors. FINRA, a self-regulatory organization, oversees brokerage firms and advisors in the United States. Investors can check an advisor’s background and disciplinary history through FINRA’s BrokerCheck tool.
Understanding the types of investments being recommended is also crucial. Complex products like inverse ETFs and ETNs carry significant risks and are not suitable for all investors, especially those with a low risk tolerance.
Churning occurs when a broker buys and sells securities in a client’s account excessively to generate commissions, rather than for the client’s benefit. Penny stocks are small-cap stocks that trade for less than $5 per share, often associated with higher risk and volatility. Forged signatures are a clear sign of illegal activity.
The long-term implications for investors who fall victim to such fraud include not only financial loss but also emotional distress and a loss of confidence in the financial system. It can take years to recover financially and emotionally from such experiences. For those who suspect fraudulent activity, consulting with an attorney specializing in securities law and FINRA arbitration is a vital first step.
While the market overall has seen periods of strong growth, individual investment performance can vary wildly, especially when influenced by poor advice or outright fraud. This incident is a reminder that even in a recovering market, investors must remain vigilant and proactive in managing their financial futures.
Source: They Trusted the Wrong Advisor… (YouTube)
