I sent the following email out and received some comments back about identifying crooked advisors. So, here is the original email. Afterward will be my follow-up comments.
If you’ve been following the local news, you probably know that Gary Armitage, Jeff Guidi and James Koenig were arrested last Thursday and have spent the Memorial Day weekend in Jail. This will probably be a very memorable weekend for them, not to mention the next 100 years of prison time they’re facing. According to the Press Democrat, they defrauded about 2,000 people out of about $200 million. These guys were supposedly “financial advisors” helping their clients grow their wealth. Over the last 30 years I’ve occasionally run into advisors like this. I can spot them pretty easily—I’m not quite sure why their 2,000 victims couldn’t.
Sometimes I think back about certain clients of mine that have told me they were thinking of hiring Armitage or Guidi instead of me to help them with their investments. What was it that was so appealing about Armitage or Guidi? Why did they ultimately choose to work with me instead of them? What are they thinking—now that the advisors they almost worked with are in jail?
Anyway, these guys belong behind bars for the devastation they’ve caused in the lives of all their clients. There may have been some parties around town last Friday when the news came out—at least some sighs of relief knowing these guys will now face the music. I join those of you celebrating.
For those of you that asked about identifying crooked advisors, I offer the following comments:
1. Find out how they get paid and watch for hints of how that may be influencing their advice to you. Are they really trying their best to help you out -- or their own pocketbook?
2. When I first got into this business, I worked with a guy that represented two different families of mutual funds. The first time he 'sold' someone an investment, he would put them in a fund from family 'A.' The next time he met with that person, he would recommend moving from fund family 'A' to fund family 'B.' He received a sales commission each time he moved the money. Had he just moved the money to a different fund within the same family of funds--there would have been no sales commission. It's in the prospectus.
3. I knew of a financial advisor that went around putting on 'financial planning' seminars. He taught his class and then would do a followup one-on-one consultation with each of the participants. Interestingly enough, his recommendation to each individual, no matter their different circumstances, is that they needed more life insurance and he would happily sell it to them. Insurance was his main line of work--it probably said that on his business card.
4. I know of another advisor that hosts dinner seminars at a local restaurant. He is quite the carismatic, out-going fellow. He could probably sell ice cubes to eskimos. Part of every client investment portfolio was an Equity Indexed Annuity. Why? He got a big sales commission check as soon as the client signed on the dotted line. Ex-clients of his told me that they really liked the guy, but had to admit that he was like a used car salesman. He was always into the 'big picture' and therefore, never fully answered their questions/concerns and left many HOLES in the 'little picture' of their day-to-day financial lives.
5. Do you remember IDC? In the early '80s when inflation was high, International Diamond Corporation came into being down in San Rafael. I was involved with them --briefly. They would sell you on the concept of buying hard-assets as an inflation hedge. They would regularly inflate the prices and send you statements showing the value of your diamonds skyrocketing. People got so excited that they would buy more and tell all their friends to buy some. If you wanted to sell--no problem, there was lots of new cash coming in the door to pay you with. Well, at least until the whole thing came crashing down. They controlled the market. No third-parties were involved.
Now, Gary Armitage...
6. His deals all involved some form of real estate. Real estate company notes, skilled nurings homes, golf courses, college campus, etc. Where is the diversification? How would you feel about holding a portfolio of only bank stocks... or only auto company stocks?
7. He had conflicts of interest in most all of the deals. He was selling the investment and earning a sales commission--as a financial advisor. He was also a general partner or on the board of directors of the companies that the investors were buying into. He was getting compensated on both ends of the deal. This information was in the offering memorandums.
8. The investments he worked with were mostly all illiquid. The investors couldn't get their money back or sell their interest. And, Armitage was perfectly okay with this!?!
9. There was no disinterested, third-party custodian reporting the transaction activity and current fair market values directly to the investors.
10. There was no quarterly performance reporting -- comparing the performance of the client's investment portfolio to the S&P 500 Index, some other Index, or the client's own performance objective.
Well, that's probably enough on this topic. I do really feel horible for those that lost their hard-earned nest-eggs to Armitage and the other scoundrels. I wish there was a way that I could easily restore their investments back to their pre-Armitage days of glory. That's not possible. You know it and I know it. All I can do, with absolute certainty, is to treat each of my clients' investment portfolios as though it was my Mom's. It works for me, and it works for my investment clients too.
... keep in touch, there will be more to follow.