DennisBeaverNovember 22, 2008 (Original publish date) • By Dennis Beaver

Part 1

If your stockbroker sold you improper, excessively risky investments, or-failed to disclose the riskiness of what appeared as an otherwise conservative investment, and as a result you lost your shirt — then today’s story will be especially relevant.

For my readers who are stockbrokers, I’ll tell you right now that I’m going to make some of you angry, revealing what most of your clients would never suspect.

This article began with an e-mail sent to me by Hal, a few days ago.

“My wife and I are both 67 and retired, living off small withdrawals from our 401K retirement account and Social Security.”

“The final stages of our retirement planning were about 3 years ago, getting our house paid off, telling our broker that we wanted to gradually move into much more conservative, virtually risk-free investments. Yet, in 2006, 2007 and early 2008, close to 85 percent of our money was in the stock market, invested in things our broker insisted were super safe. We trusted him to watch out for us,” he continued.

“In January this year (2008) we met with our stockbroker, concerning about the economy and the safety of our investments. Most of what we were sold proved to be the worst imaginable, including Washington Mutual, Wachovia, Lehman Brothers, Indy Mac Bank and other financial institutions who have gone out of business, and I should not forget Freddie or Fannie. From a retirement nest egg of over a million dollars — built over 25 years — we have something like $200,000 remaining, in bank C.D.’s. Both of us are now under the care of our family physician, who has us on anti-depressive medication. We tried to play by the rules and now feel so badly cheated.”

“From what we have described here, do you feel there is anything we can do? Do we have realistic claims against our stockbroker for putting us into those investments?”

Those hurt worst did all the right things

The last several months of 2008 will be seen by future historians as one of the most destructive economic times in our nation’s history. So often, those who did “all the right things” in terms of financial planning were the worst hurt.

In many cases, they were the ones with responsibility, discipline and, most of all, fear of poverty handed down to them by parents who still had memories of the Great Depression.

They used credit cards sensibly. They bought what they could afford and what they needed. They didn’t buy a home well beyond their means or drain equity from a house they had nearly paid off, committing themselves to many more years of house payments just to buy an SUV or take a vacation. In short, they realized that unnecessary debt was dangerous. In a nation where only the few maintained a savings account, they took joy in the simple act of saving.

“Your readers are an example of the couple who did everything right. They saved for retirement, avoided debt and trusted a broker to guide them towards the right investment decision. In an incredible number of instances, it was trust wrongly placed, not only because clearly improper investments were sold them, but had the truth been known as to broker’s compensation or the real risk associated with these securities, the customers would have never purchased them,” argues Securities Attorney Nicholas J. Guiliano, who specializes in the area of Investment Litigation.

“You were lucky to get through,” the straight-talking Philadelphia lawyer told me during our recent conversation. “Our phones are lit up like Christmas trees, but it is going to be a sobering Christmas for millions of Americans this year, and very likely for several more years to come,” he fears.

His beliefs were shared by a high school principal turned stockbroker, with whom I discussed how so many hard-working people got taken. We spoke with my assurance of confidentiality.

Your stock broker is only a salesman

“Dennis, the public needs to see past the lovely offices, expensive furnishing, and appearance of prosperity this industry creates. I and thousands of stock brokers like me are salespeople — that’s all we are. So much of what we call “investing” is really a form of gambling — so much hot air — with the assurance if you stick with the program, we’ll deliver just what you need for a secure retirement, your children’s college expenses, or whatever your goal.”

“Our training includes an enormous element of sales psychology — how to create the image that we care, can be trusted, and our experts see the future. The truly dangerous part of this is the art of making the client feel just a little bit silly, stupid or ignorant if they don’t follow our recommendations.”

“We are very good at making the typical client feel inadequate to make sound financial decisions, and to therefore rely on our advice. We replace their legitimate doubts with soothing assurances of our concern for their welfare, and their feelings are well known and have been taken into consideration by management in forming our recommendations,” he added.

“Think of a stockbroker as one of those pretty ladies at the perfume counter of your local department store. She is there for one purpose only — to make a sale. As she is probably on commission only, if there’s no sale, her time with you has been wasted. Of course, if you buy the perfume, at least you’ll smell nice. We can’t guarantee anything similar — and lately, nice isn’t the fragrance which has come to mind — and the public needs to realize that.”

“Sure, there are brokers who do care and don’t knowingly sell junk to their clients. But one of the ethical challenges is our Football Team mentality, where we are encouraged — in part through generous perks — to push certain investments, and to laugh off questions a few gutsy brokers occasionally ask about excessive risk. They are usually patted on the head and told not to worry,” he concluded.

Next week: The warning signs were obvious years ago. But do you have a case against your broker?


Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.



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