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Should I tell a client they’re working with a swindler?


tede02
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I’ve found myself in an tough spot. Three years ago, one of my clients disclosed to me that he put a material amount of his investable assets into an annuity contract. This came as a surprise to me because I’ve worked with this guy for years, have a good relationship, etc. The transaction didn’t have any impact on my working relationship with the client and it may work out just fine for him as he transitions into retirement in 5-10 years. However, from day one I was concerned that he got pitched something from a salesman that didn’t have his best interests in mind. This week, I decided to broker check the guy who sold him this contact. To my astonishment, the guy has TWENTY FIVE complaints/disputes/misconduct allegations ON RECORD that have resulted in hundreds of thousands of $$$ in refunds and settlements over the last eight years. I feel like I’m in a tough spot because I manage money for the client. Do I say, “Hey, you should probably be aware of this,” or just keep my mouth shut? I’m just concerned that coming from me, the client may feel like I’m just bashing this other guy, and the client’s decision to buy the contract in the first place (and somehow the whole thing backfires). What would you do?

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Ugh, really tough spot.

 

I found out some family members were swindled by something similar about 12-13 years ago.  Retirement in high fee annuity and homes refinanced to interest only pre-crash.

 

I built out the case, showed some trust worthy family members who understood and tried to figure out the right plan of action.  One had asked me for financial advice, I showed her the broker check stuff, how bad her deal was etc.  She let us work with her to unravel things and get out.

 

Her brother was in much deeper.  We had an "intervention".  It didn't turn out the way I expected.  This relative didn't believe any of the allegations were true.  Some were things like "Impersonating the IRS" and using trademarks that weren't his.  The relative just totally disregarded any facts and evidence we had because "the advisor said it wasn't true, and there are mistakes online."

 

This is what you're battling.  The advisor knows this is out there and they have answers for it.  Your client trusts that advisor, so they're going to trust the answers as well that they're given.

 

No one likes to know they've been taken.  You need to figure out what you're going to do, and how can you present a win-win solution without anyone losing face.

 

Also consider that for whatever reason they felt like this product had some place in their portfolio.

 

From our perspective (and yours) this was a really stupid move on their part.  But if you want to help them you need to be sympathetic and be on their side.  That this is something anyone could have been tripped up in, etc.

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I’ve found myself in an tough spot. Three years ago, one of my clients disclosed to me that he put a material amount of his investable assets into an annuity contract. This came as a surprise to me because I’ve worked with this guy for years, have a good relationship, etc. The transaction didn’t have any impact on my working relationship with the client and it may work out just fine for him as he transitions into retirement in 5-10 years. However, from day one I was concerned that he got pitched something from a salesman that didn’t have his best interests in mind. This week, I decided to broker check the guy who sold him this contact. To my astonishment, the guy has TWENTY FIVE complaints/disputes/misconduct allegations ON RECORD that have resulted in hundreds of thousands of $$$ in refunds and settlements over the last eight years. I feel like I’m in a tough spot because I manage money for the client. Do I say, “Hey, you should probably be aware of this,” or just keep my mouth shut? I’m just concerned that coming from me, the client may feel like I’m just bashing this other guy, and the client’s decision to buy the contract in the first place (and somehow the whole thing backfires). What would you do?

 

I've had to deal with this on at least four separate occasions in the last 20 years.  I sat them down, put all of the information I had gathered in front of them, and helped them figure out options to deal with it...not once did I suggest to bring the capital to me to invest.  That way, I cleared my conscience of what I know, helped a friend/client deal with a potential investment timebomb, provided them solutions or options, and never made it about not investing with me. 

 

You won't believe the results.  Only in one instance did they actually do anything about their portfolio.  Three let it ride with the advisor...one brought it over to me to manage. 

 

Of the three that let it ride with the advisor...one who was put in an inappropriate annuity ended up ok and got their money back at the end of the annuity...one who was letting their cousin invest their portfolio at a local brokerage kept losing huge sums each year in penny stocks...and the last one who put it in an inappropriate, ill-liquid investment ended up having to let it ride because they could not redeem, and ended up losing 75% of their RRSP.

 

Cheers!

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The annuity industry has been booming over the past couple of years. We should all be on the look out for unscrupulous actors selling annuities in particular.

 

Parsad and Oddball do a great job of laying out a range of possible responses. I suspect a salesman who has racked up 25 complaints is either working with a very sketchy organization or is likely a narcissist or a psychopath. They are likely VERY charming. Assume this salesman is charming and might even work to inspire deep loyalty among their victims.

 

I think you have to try though. You may not have seen the fire itself, but you have seen plenty of smoke.

 

 

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I was talking to a guy who knew of an insurance sales guy who was pulling down a ton of money but was really shady.

 

Supposedly, someone once asked the insurance sales guy how he sleeps at night and the salesman said something to the effect of "in the finest sheets known to man."

 

 

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I was talking to a guy who knew of an insurance sales guy who was pulling down a ton of money but was really shady.

 

Supposedly, someone once asked the insurance sales guy how he sleeps at night and the salesman said something to the effect of "in the finest sheets known to man."

 

Par for the course for those types. Also drive leased cars and live paycheck to paycheck, aided of course by American Express.

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I appreciate the input. I was looking further at the broker-check disclosures. The aggregate settlements paid out on the 25 disputes is around $2 million! How does this person not banned from the financial services industry. I think I'll ultimately bring the issue up with my client genuinely out of concern.

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I appreciate the input. I was looking further at the broker-check disclosures. The aggregate settlements paid out on the 25 disputes is around $2 million! How does this person not banned from the financial services industry. I think I'll ultimately bring the issue up with my client genuinely out of concern.

 

I'm sure he brought in a lot more than $2 million to the firm. The financial services has the reputation it does for a reason. Think about all the clients he talked out of suing him or who didn't figure out the issue.

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As a financial services professional, I will state strongly -- you have a DUTY to bring this to your client. Who else can call this stuff out besides professionals? The layperson often doesn't know they're being fleeced, and the regulators are weak, and understaffed.

 

Do it as best as you can, do it with the most tact you can gather (lots of good suggestions above), but above all, do it.

 

Since you already manage their money, there shouldn't be any accusation of self-interest. Taking a modest amount of risk to yourself on behalf of others is among the highest forms of honorable behavior.

 

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Would you want to know if you were on the other side?  I would.

 

My experience echoes some of the other members.  I tell the other party and they listen and try to take action or they just stick their head in the sand.  It depends on the person involved (ie big ego, etc). 

 

Don't take their reaction personally at all if it is adverse.

 

I have heard from an "insider" that some of these complex annuities are like scams to be avoided. 

 

(sarcasm: They are so complex and the person selling it must be smart because it is complex so the salesman must be financially sophisticated.  I don't want to say I don't understand it because that would make me look like an idiot.) 

 

It is a powerful thing saying "I don't understand" or "I don't know" but the most difficult answer of all.

 

 

 

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Guest cherzeca

can the annuity be unwound?  you likely don't know the answer to that question, though if you can read the contract that should be discernible.  I would want to know if there is a remedy in this situation beyond just dont do more business with the guy

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First, I'm not a professional adviser.... but based on my experience with a family friend, you should tell your client about the violations, not because it will change anything in the near term, but because its not ethical for you to sit on this information and you will sleep better knowing you tried to help. 

 

In my case, the questionable adviser was an outgoing person who had excuses lined up on how his violations were from government regulation run a muck. This played well to my friend's politically conservative nature who found the adviser more believable than regulators. Over time, the adviser's investments high commission private REITs, performed spectacularly poorly even though the quoted price in the statements never went down - until the end - when they eventually liquidated for 25 - 40 cents on the dollar.  I sent her some information on private reits and made clear that I didn't think her adviser's strategy was appropriate, but his pull was too strong.  And while I didn't rescue my friend from those particular investments, she is more careful now going forward.

 

You are dealing with powerful forces of denial, so I wouldn't want to get into a comparison of your services vs the bad adviser's.  Frankly, the other guy who can sell that crap is by definition a better sales agent than you are since you are probably (I hope) incapable of selling that kind of stuff. Rather, I would suggest educating him or her by finding third party information such as Jason Zwieg's WSJ articles on annuities and the FINRA databases for looking up adviser violations. Tell your clients who own annuities that many annuities, especially complex ones, are problematic before mentioning that some advisers who sell them often get into legal problems. Lastly, I would offer your services to your client should they ever decide that that particular annuity they own, may not be meeting their financial needs.  If your client is open to admitting a mistake, they will appreciate your help.  If they don't want to learn this about their investment, your soft approach will not offend them, and you guys will implicitly agree to never bring up the topic again.

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I’ve found myself in an tough spot.

I think I'll ultimately bring the issue up with my client genuinely out of concern.

Here is some contrarian advice.

What is the scope of your relationship with the client?

I assume it is professional but do you have a specific mandate or are you involved as an investment adviser with a wide mandate, including explicit suitability issues?

The scope of the relationship defines your duty of care and loyalty.

You have asymmetric information and you wonder if you should share this information even if other interested parties (including your client) may conclude that your intent is related to a potential conflict of interest...

You know that annuity contracts can be shady and you think that the other member of your profession is probably disloyal but you are not sure of that.

I would be careful if your situation implies getting involved in a professional relationship that is beyond your specific mandate. Your client sharing this info is not the same as your client disclosing this information with mandated and specific questions about the product or the professional selling the product. If the definition and the context of your relationsip allow it, you could answer questions and provide objective information related to suitability and asset allocation and point the potential risks related to annuity contracts and to the possibility to verify the credentials of the involved professional (I assume this is public record in your jurisdiction).

 

Just imagine that your client, during a meeting, 'discloses' a new personal relationship and you happen to have very unfavorable reviews from reliable sources about this new person. Would you get involved in that relationship for the good of the client?

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