Corrupt financial advisor?

January 20, 2009 9:20 PM

Is advising a client to write a bad check be considered unethical behavior for a financial advisor? What should our next steps be and who monitors financial advisors' professional actions? As usual, there's more inside...

Dad recently passed away. Within a year before he died, Mom & Dad discovered that their $250K+ investments had shrunk to $70k only by calling their broker to inquire about their account. He hadn't notified them of anything despite the precipitous drop in their balance. They transferred $40k to bonds at that time. Now -- 1 1/2 months later and after Dad's death -- the broker advised Mom to write a bad check to cover a bill and she (unfortunately) followed his advice.

How can a broker ethically advise that to a client? Do we have any recourse? She followed his advice and now is $2k overdrawn and facing fees and penalties as a result.

This month's investments report says her account is down to $51k. She's 77 years old and lives 2500 miles away from us. Mom and my siblings and I have agreed to move her funds to someone she trusts, but I'm not sure how to find the right person to work with her (and probably me, since Mom doesn't appear to be up to managing her own finances), and who to report this guy to in the hope that they can stop him from repeating this behavior with another senior citizen. Advice, Mefites?

posted by northernlightgardener to work & money (8 comments total)

... Mom & Dad discovered that their $250K+ investments had shrunk to $70k only by calling their broker to inquire about their account.

Weren't they receiving monthly statements? If not, why not?


... the broker advised Mom to write a bad check to cover a bill and she (unfortunately) followed his advice.

Do you or your mother have proof of this? A letter? A recorded conversation by the broker's firm?
posted by terranova at 9:36 PM on January 20

Is there any evidence that some action or inaction by the broker caused the loss in value of their investments?
posted by JimN2TAW at 9:47 PM on January 20

Please give more information. Write a question this poorly and and you make it impossible for people to give you intelligent advice.

Explain the situation with the "bad check," please. What was the bill being paid? What was the amount of the check? Why is this a problem, if there is $51 thousand in assets? Generally, if a person with money writes a bad check, the check can be made good and there's a $50 loss, at most. Is there more to this story? Why would your mother accept anyone's advice to write a bad check (presumably an adult has enough common sense to know one doesn't write a bad check).

With regard to the investments, how did the investment advisor have anything to do with the value of the assets? Everyone's portfolio has shrunk dramatically lately. How is your mother's portfolio any different? What has this advisor done that you find fault with?

Please come clarify these matters. Your question is so poorly written it is impossible to give intelligent advice.
posted by jayder at 10:57 PM on January 20

Your question is alarming for many reasons, and has several components all of which illustrate a borderline lack of ethics.

First of all, the drop in portfolio value by some 70% is alarming, given the fact that your parents were clearly retired. Without knowing precise dates this implies that the assets were deployed in classes not advisable for individuals of that age.

Can you post what they were invested in? Advisors must put clients interests first, and for people your parents age that means preservation of capital. On the surface at least it seems the broker in question hadn't employed proper diversification techniques, none of which are rocket science; i.e., we teach portfolio diversification and management to first year Finance Masters students these days.

Second, this $40K transfer - who initiated it, precisely when, why was this transfer done and specifically what bonds were purchased? The worst possible thing to do in poorly performing markets is to make a panicked, emotional trade. This action alone (i.e., transferring some 50% of assets during a time of market underperformance) is troubling. Was a loss realised due to this transfer?

Third, the "bad cheque"; as terranova asks, what evidence do you have that this advise was offered? If it comes down to hearsay I'd soft pedal on this one.
posted by Mutant at 4:37 AM on January 21

I would call your State's Board of Accountancy, find out who this mofo is licensed by, and pursue all sorts of action.

I'm guessing that a financial advisor who tells his clients to write bad checks also has no problem robbing from the deceased.(hint hint)

good luck and I'm sorry about your dad.
posted by hal_c_on at 4:18 PM on January 21

I bet your parents' broker was churning if he wasn't outright engaged in fraud, although it's just possible he's a really really bad investment picker and your parents were fools to rely on him. But you really will want to have a lawyer familiar with securities and investment issues look at the account history to determine if there is any cause to sue. The recovery could be not just the $180K that vanished, but penalties beyond that, so it's entirely possible you could get an attorney to pursue him for a minimal retainer.

Regardless this is far outside the bounds of respectable investing, Madoff notwithstanding.

If the broker in fact advised your mother to write a check on her $51K account and that bounced this is a call to the attorney general or equivalent for immediate legal action. Funds being unavailable is not a red flag, it's a tornado siren.
posted by dhartung at 10:12 PM on January 21

My apologies for the lack of clarity. Hopefully this will help:

When we phoned the broker, he admitted he'd advised Mom to write a bad check (verbal statement, not recorded). The check was for $2300 to cover the cemetary plot where she had Dad's body buried. His reasoning was that she had a $24k death benefit owed to her that should be paid 'soon' and that would reimburse the overdraft (although he told her she should give him the death benefit check as soon as it came in -- which we've told her 'no way'. The death benefit check still has not arrived.)

As to why their accounts were in high risk investments, we wish we knew. Dad made their financial decisions, and he's no longer here to ask. Mom had 62 years of not making those decisions, and she doesn't appear to have enough self-confidence to take on that role in the aftermath of Dad's death. She told us Dad decided to transfer $40k into bonds when their balance dropped to $70k, and it appears it may well have been a panic decision -- but the move did protect those funds. It appears those funds are about all that's left.

We're trying to decide whether there was gross incompetence or lack of ethics by the broker that warrants some sort of action on our part, or whether we should just forget it, remove her money from his management, and walk away. We know -- too late -- that Mom and Dad apparently weren't making good decisions. We don't know many specifics about the specific accounts at this point.

At age 77, there's not a lot of hope that their investments will recover. We want to protect her in the best way possible and keep others from experiencing similar devastating losses if we can.
posted by northernlightgardener at 10:36 PM on January 21

Ok, just leave the bad cheque thing for now. Its an indicator of this individuals overall lack of ethics, but hardly actionable on its own at this point.

Action plan:

• What type of account was this? A Discretionary, Managed or Controlled Account all grant the decision making power to a third party, in this case the broker. This is a little confusing at this point - you said "Dad made their financial decisions..." but then later "...remove her money from his management..." - does this mean your paw made trading decisions and communicated orders to your broker, or did your broker take responsibility for the cash? If the former then you have no reasonable recourse; the assets were purchased by your father and the broker simply executed orders. If the latter then see my previous comments about lack of diversification and especially preservation of capital. A third possibility - and one that potentially would see you getting 100% of losses covered would be if your broker were trading the assets without your fathers knowledge, or perhaps after and in full knowledge your paw had passed away. I've been in this business a long time and sadly have seen such bullshit before. If this is the case nail the SOB to the wall. So you really have to find out what type of account this was before proceeding further. I'd suggest writing letters and not talking to the guy any longer, given the severity of what's transpired, what may be at stake and especially so as the individual in question has shown a remarkable lack of ethics re: advising that bad cheques be written. Talk is cheap. Get it in writing and confirm via another source.
• You need all brokerage statements, going back for at least five years. Statute of limitations is state specific and (IIRC, I haven't been through this material in years) can be as little as one year from when you became aware of the alleged infraction. You'll need to see what was going on in the account for a reasonable period and be prepared to move quickly i.e., approach a solicitor who engages in this type of work.
• You're going to have to find out if there was an Arbitration Agreement in force between your father and the brokerage. If so you'll have to push this through arbitration (unfortunately, many times binding although there are ways around this) and see how things shake out. Again, if your father made all the decisions and the broker simply executed orders you have no reasonable recourse unless it turns out the broker was trading assets without permission.

Finally, the bonds that were purchased. I really, really hate to see folks make trading decisions based on emotion. Again, why kind of bonds were they? Keep in mind US Government securities aren't totally safe, unless held to maturity even in the best of economic times (and there currently is a very large bubble in govvies).

This is a very dicey economic environment and its tough to make money now. I don't see any reason for retired people to be actively trading. Stay in cash or hang on to unrealised losses, but please don't trade on emotion, and don't trade at all without good reason until we start to see the smoke clear.

Hope this helps!
posted by Mutant at 3:00 AM on January 22