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Should Clients Sue?

By Rob Lambert - Email Editor

Date : November 4, 2008

Dear Valued Reader,

As we have all seen with horror, the stock market has really taken a nosedive over the last several months. The S&P 500 index nearly reached 1,500 and in the month of October, it dipped down to nearly 900. That's a 40% drop in value on the way down and to get back to 1,500 the index would need to go up by 66% (because your clients are working off of a lower amount to build back up to 1,500).

A Quick Aside

On to the Story

I have a friend whose dad recently died, leaving his mom (age 66) with $400,000 in a brokerage account, a modest pension that would continue to pay, a residence with no debt and a vacation condo in FL with debt (that is rented). 

My friend said that he and his mom were going to see his dad's money manager for advice about what mom should do with the $400,000.  My friend wanted my opinion before he went to talk to the broker.

I said, before I tell you my opinion, I want to see what your dad's money manager says.  I predicted that the money manager would tell his mom that she needed a "properly balanced stock and mutual fund portfolio" and that in my opinion, that advice is just awful.

Sure enough, at the meeting with the money manager, the advice given was just as I predicted.  To put a 66-year-old lady with all of her remaining liquid assets into the stock market with no protection is an awful idea.

Next, I educated my friend on Fixed Indexed Annuities (FIAs). I told him to review the following PowerPoint presentation and ask the money manger if he knew anything about them and if he had an opinion about them.  The following PowerPoint not only discusses FIA but also the 7% guaranteed return FIA (accumulation value) with a lifetime income benefit.

I predicted that the money manager would not even know what they were and that after a few days of research the money manager would come back with 5 reasons FIAs are not good and then pitch a Variable Annuity (VA) with somewhat similar characteristics.

Guess what? I was right.  That's exactly what happened.

What did my friend ultimately do with his mom's money?

Amazingly, he took the money manager's advice and put the money in the market.  What can I say, just because I've written four books and have the only advanced educational entity in the country that educates on "advanced" planning, etc., you are still never an expert even to your friends until you are from 30 miles out of town.

What's the problem with the above story?

The biggest problem with the above story is that many money managers (like my friend's money manager) really don't know anything about FIAs and their protective benefits, guaranteed rates of return (accumulation value), and the ability to give a guaranteed income for life.

What do you think about having a 66-year old single client who is not working and will not be accumulating any more assets for retirement putting all of her money in an "actively" traded but” properly managed" brokerage account?  I think it's a terrible idea.

Industry Problems

You should know that I talk to at least one money manager a week who has never heard of FIAs. 

You should know that I talk with several money managers a year who tell me that their broker dealer (BD) will not let them sell FIAs or even talk about them.

Do you see the problems from a liability standpoint for the broker?

Remember I was a litigation attorney so the problem jumps right out me. Let me list a few of the liability problems, keeping in mind it is the money manager's job to give prudent investment advice to clients (which should include full disclosure):

When an advisor is helping a senior client grow wealth and doesn't know about a product where the client will never lose their money due to stock market losses and where the client earns gains pegged to the S&P 500 (with a cap which today is running at about 9%), and where the product locks in the gains every year, that's a real problem.

When an advisor who does know about FIAs and doesn't disclose to a client that they are forbidden from dealing with them by their BD, that's a real problem.

What would a lawsuit allege?

1) That there was a duty to provide prudent advice.

2) That the duty was breached because FIAs were not discussed with or disclosed to the senior client as a way to help mitigate risk to prevent the client from losing 40% of their stock/mutual fund portfolio at a time in their life when it is much more important to protect principal than to reach for significant growth.

3) And, that because of the lack of advice, the client has been harmed in the amount of 40% over the last few years. And to boot, the lawsuit will throw in pain and suffering of a senior client whose health has declined significantly due to her worries about running out of money in retirement due to the negligent advice.

*The advisor would have a good argument to avoid litigation if he/she offered a VA with a guaranteed rate of return.

Will the client win the lawsuit?

I think there is a great likelihood that a jury of the client's peers will side with him/her and award damages.  Why? Because the duty was breached by not discussing FIAs and if the advisor happens to work with a BD that doesn't allow their advisors to talk about or sell them, then it would be a slam-dunk case.  In fact, it wouldn't surprise me if there were some very large class action lawsuits against large wire houses.

Moral of the Story

From a non-advisor standpoint, be very careful whom you receive financial planning/wealth building advice from.  The chances are high that your advisors are not familiar with the best ways to help you protect and grow your wealth.  In addition, of course, if you have any questions about the advice you've received from other advisors or if you simply want to talk with someone who knows the best ways to help you protect and grow your wealth you can contact Trustmakers.

Until next week,

Roccy M. DeFrancesco, JD,CWPP, CAPP, MMB

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