Kelly went into the bank where she and her husband (and his father) had done their business and personal banking for over 40 years. It had been acquired several times and now was part of a publicly traded company. The teller noticed that their savings account had over $225,000, and suggested that she discuss how to get a better return with one of the bank’s investment advisers.

Kelly met with the adviser. She told her that this money needed to remain safe and explained how they had lost of lot of money in the market during the era, and that her husband survived cancer but still wasn’t able to run the family business the way he had before his illness. The adviser assured her that they could keep the money safe and get a better return than they were currently getting.

Advice Only a Banker Rep Could Love

The bank’s adviser showed Kelly a couple options: CD’s that paid 1%-1.5%, and a municipal bond UIT. She compared the two side by side and said that municipal bond fund would pay them close to 5% tax free. And there was no extra risk to get this 5%! Further, the adviser in a handwritten note assured her there were “no fees to you” in her side by side comparison.

The so-called adviser never asked Kelly about the mix of their other investments held away from the bank; never mentioned the risk of rising interest rates; never mentioned the risk of portfolio defaults (the underlying credits were a mix of investment and high yield bonds); and never mentioned that the fund used leverage which can magnify returns or losses.

Neither did this adviser take heed of Kelly’s insistence that the money needed to be kept safe. She manufactured a suitability form that said Kelly had a moderate risk tolerance, was above average in investment knowledge, and that she received a prospectus. None of these things were true. But Kelly signed the suitability form and went home to discuss the investment with her husband.

Never Sign What You Don’t Read and Understand!

Kelly’s error in judgment was that she signed something she didn’t understand. She assented to questions she hadn’t been asked, and confirmed receiving a document that she never received. She had just trusted her life story to a firm they had done business with for 40 years. The trust was misplaced. Kelly showed her husband the handwritten side by side comparison and relayed the conversation. They decided to invest $225,000 in the Municipal Bond UIT.

The Perfect Storm

In the 4th month after investment interest rates started to rise. The fund lost about 5%. After the 5th month it was down about 10%. The city of Detroit’s bankruptcy was also causing panic in the municipal bond market. When Kelly called the adviser told her it was a short-term issue and that it would come back. In the 6th month, the fund was down over 20%. Kelly called the broker several times and noted this was not like a CD. The adviser took a more combative, smug tone. Kelly called me to get a second opinion. I had her bring me all their statements so we could review and piece together reality. By the time we got together the fund was down 30%. Not looking good.

Follow the Motive

Despite the hand-written “no fee to you”, the fact is that statement showed in months 4, 5, and 6 fees were taken from the investment principal that added up to 6% commission. The “advice” motive was looking obvious; and her lie about fees was a fraud. The CD that had been shown for comparison had very little incentive for the adviser. That’s called conflict of interest. And the basis for the recommendation was either the commission or advisor ignorance or both. Neither one serves client interests.

The Truth is Less Believable than Fiction

We called the branch manager who was clueless and had no authority. Then I called their compliance department, outlined the case, and set up the meeting. Kelly went into their office and I phoned in from out of state.  After the initial pleasantries, and the corporate BS assurance line that “we take these matters very seriously for our clients. We want to hear the story so we can get this matter resolved for you.”

I told them that due to the deception in selling process, we wanted to be made whole on the loss. As the call proceeded, I somehow got disconnected. Bad coincidence? As I found out later, the bank’s two compliance persons tried to make Kelly feel guilty by telling her the “adviser has a clean record and this won’t look good for her.” And that was how most of the call went. Worms. By the time I could get re-connected they were wrapping up, and they said they would get back to us within 10 days. When the letter arrived, the bank said they would do nothing.

Kelly had immediately begun calling attorneys. And Voila! She found an attorney who promised to take the case on contingency with no cost and they would take money only if they won.  The attorney assured her there was little risk of losing and everything to gain. She was ready to sign. I told her to wait and I called and inquired further. He must have forgot to mention to Kelly that they would need to bring in a couple specialists to do forensic work that would have fees of $10,000-$15,000 just to get started. This would have been spending good money for bad.

Keep It Real

I made a couple calls to reputable attorneys.  They agreed the chance of winning was good; however, the claim amount involved meant they couldn’t take the engagement in good faith because their fees would eat up the lion share of the losses.  In fact, he explained to me that banks look at settlements of less than $50,000 as their “fraud free” zone because when people realize the legal cost, they realize it isn’t worth the fight.

Now What? Let the Worms Win?

No. One doesn’t need a lawyer to file an arbitration case with FINRA. However, it’s a process that’s outside of my normal activity. Yet I was so incensed by the sliminess of this whole process that I was prepared to do it. When I perused FINRA’s website for the forms and the instructions on how to file arbitration, I found a link to consumer awareness tips. There I found a list of resources to help consumers who believed they have been cheated. In this list was a university legal department that offered its services at no cost.

I discussed the case with the professor and former securities attorney who supervises the law students and he told me what they do. I supplied them with all the facts and history they needed. In fact, they had won a case with the same Municipal Bond UIT!  The put together a robust presentation of the facts and submitted it to FINRA for arbitration. Within three weeks, the bank said they would be willing to bypass arbitration and mediate at 85% of what we can had asked for.

What Change Did We Make?

This type of financial supermarket is a good business model for the banks: no-cost, captive lead generation by tapping into their banking relationships. Many a bank customer has fallen prey to very similar sales tactics. I think you would agree it’s a lousy service and economic model for the client.

We gave objective advice vs. a conflicted product sale that was called “advice.” And we found a remedy for the abuse. Kelly and her husband learned a lesson and we got most of their money back. And corporate greed was forced to pay for its sin. That’s work that matters.

Jerry Matecun helps business owners and individuals discover key planning and investment considerations vital to build and protect the value of your business and personal assets.  For a no cost, confidential conversation regarding your situation call or email Jerry at 949-273-4200, or 

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