Is That Even Legal?
Is That Even Legal?
Some Financial Advisors Are Fraudsters - How To Protect Your Peace of Mind
Are you aware of the complexities that can arise when you trust a financial advisor with your hard-earned money? This episode takes you on a journey through a riveting case of betrayal, where a financial advisor exploited the trust of a long-time client, leading to significant financial losses. As we dissect this story, we unveil the crucial lessons that can be learned from such disheartening incidents, emphasizing the importance of continuous involvement in your financial journey.
Navigating the world of investments can be daunting, and trusting the wrong person can have devastating consequences. We discuss the delicate nature of roles between financial advisors and trustees, emphasizing the red flags that should never be ignored. You’ll learn how to effectively separate these roles and why doing so is essential for your financial well-being.
Join the conversation where we share steps you can take to ensure your financial security, including the importance of regular checks on your investments, understanding the roles of fiduciaries, and the need for transparency in financial dealings. Protecting your future starts with being informed and vigilant.
Don’t wait until it’s too late to secure your wealth! Tune in, and be sure to subscribe for more insights on safeguarding your finances while navigating the often murky waters of financial advice. We’re committed to helping you make informed decisions—because no one cares about your financial well-being more than you do!
Is that even legal? It's a question we ask ourselves on a daily basis. We ask it about our neighbors, we ask it about our elected officials, we ask it about our family and sometimes we ask it to ourselves. The law is complex and it impacts everyone all the time, and that's why we are here. I'm attorney Bob Sewell and this is season five of the Worldwide Podcast that explores that one burning question. Is that even legal? Let's go.
Marshall Hunt:Welcome to. Is that Even Legal? And today we're going to talk about safeguarding your finances, your estate and your peace of mind. I am Marshall Hunt, I'm in the host chair today and I'm actually going to be interviewing the normal host, bob Sewell. How are you doing, bob?
Speaker 3:Hey, I'm doing well. Thanks for taking over my job, yeah yeah.
Marshall Hunt:So I thought this would be a good one for you to sort of be the guest on, because you and I were chatting about different things in the news and we saw this kind of sad news story come through within the last couple of weeks. I'll kind of give some of the background and then maybe we can talk about it and talk about ways that people can use this sad story to not fall into the same trap.
Marshall Hunt:So just a couple of weeks ago, yeah, arizona's Corporation Commission, which regulates securities in Arizona, announced that they'd awarded $1.1 million in restitution and another $150,000 in administrative penalties against a Mesa Arizona financial advisor. Like I said, it's a sad case. The financial advisor had been a security sailman since 1987. Had been a financial advisor since 2007, so a long time. Mar's, a married guy, lived in Arizona since 1984. And so this guy had a client, also a longtime Arizona resident since at least the 1970s. The client had sold a business. The client had been running this business for more than 20 years and had an attorney help this client in the sale transaction. The attorney structured the transaction in such a way that the client was going to deposit part of the proceeds just under a million dollars in a charitable remainder trust and then the attorney recommended that this client find a financial advisor.
Marshall Hunt:It's not an uncommon story that someone works for a long time. They're a great businessman, they build up this business, they decide they want to retire, they sell and all of a sudden they got this big pot of money that they're not necessarily as familiar with what to do with it. So this guy does everything right he has an attorney, he gets a financial advisor, he goes and meets with this financial advisor. They get along, they talk about investments and the client agrees to put $830,000 into an annuity. So you know, so far so good. But this is like late 2007, early 2008. So we're in great recession territory. So we're in great recession territory and you know, I haven't seen any of the reporting that this was necessarily the reason why, but it's not hard to imagine that you know someone in this case the advisor, for whatever reason, decides that he's going to do some not good things and treat this person's money as his own. So this advisor was pretty devious. He apparently first lied to his employer, so he was employed by this securities broker and he said, hey, he told his employer that this client was his uncle and he asked to be placed as the trustee on this charitable remainder trust, um, and his employer said, yeah, that's okay, you know, since he's your uncle, we'll let you be the be the trustee. So that wasn't true. He's, you know, has no relation to this client. He then has access to the accounts and, in particular, this um uh annuity, and he proceeds to just drain the annuity of all of its value and apparently eventually liquidates it in 2016, after having taken like $870,000 from this charitable remainder trust. And then it gets worse because he covers his tracks by creating fake account statements showing that the money was in fact invested and growing.
Marshall Hunt:And then the saddest part to me is apparently this goes on for like 12 years, the advisor's meeting with this client quarterly. They become kind of good friends. They start to meet in the evenings over dinner. They bring their wives they all know each other and then, of course, eventually you gotta pay the piper and one thing leads to another. The client gets wise in about 2021, you know. And then here we are today the advisor's lost his license, he's permanently barred, basically, from having securities licenses, and now he's got this huge financial hit that he may or may not ever be able to pay back. So long sad story. What I want to know from you, bob, is what can people do? It seemed to me like this client kind of did everything right. They went to the professionals, they tried to rely on people that were were licensed, but still got in the hot water yeah, first of all, that story is incredible to me.
Speaker 3:I mean, I don't, I don't know what goes through the mind of this type of criminal. I mean, are they really are? Are they devious? Are they just, you know, are they sociopaths? What goes through their mind? How long do they think they can get away with this? And I wouldn't be able to sleep at night if that happened to me, I mean, if I did that to someone, and then much less if it happened to me. Yeah, they seem to be doing everything right, but you know, and I don't know if they could have taken extra precautions. I mean, first of all, I'm going to Monday morning quarterback this, okay. But the first thing that's going through my head is how this guy ends up being named as the trustee and how any attorney let that happen. Any attorney let that happen. And it could be that the guy just changed up the paperwork. The guy who did the evil deeds here just changed the paperwork without even knowing, knew, like his attorney, or the client knew, that he was the trustee. Then we have an issue.
Marshall Hunt:What's the risk of having your financial advisor also be a trustee. On a trust like this.
Speaker 3:First of all, that should never happen. Generally speaking, finra is not going to allow that to happen. Most financial institutions will not let the financial advisor be the trustee. There are different roles. Let me explain. A financial advisor is to advise on how to invest and the trustee is to advise on managing the trust, and you generally don't mix those two except under really rare circumstances, and those circumstances are going to be. I choose a financial advisor at a bank. Excuse me, I choose a trustee at a bank and that bank ends up also managing the funds. But I know a lot of financial institutions that keep them separate, where they have the trustee house on one side and then they have the.
Marshall Hunt:That was the case. They only had an exception for family at this investment institution, and that's the exception that this fraudster apparently exploited.
Speaker 3:Exploited, yeah, but I mean, if the attorney had any chance to interject himself into that, he should have or could have, or maybe it would have been the best thing. I don't know. I don't know enough facts about that, but this is a you know a story that if you're looking at needing a trustee other than a family member for a trust, don't choose your financial advisor and I. That just not their role. It's not the way they think. Financial advisors think about making money, making money for themselves a lot of times, and then the next thing is making money for other people. Now they you would think that they would be thinking the other way. If I make money for other people, then I know people come to me and I will make money. It's just not in human nature, right? So? And so what I would do? If I am a person who needs a charitable remainder trust and I guess let me just say this I want to tell you what a charitable remainder trust is.
Speaker 3:First, a charitable remainder trust is complicated. These things are not for everybody. The IRS looks at them heavily. Not for everybody. The IRS looks at them heavily. There's been a lot of chicanery with charitable remainder trusts, and so the IRS puts a heavy eye on these things and it ties up your money. You put your money in an irrevocable trust and, yes, there's a lot of tax benefits to a charitable remainder trust and you could have a guaranteed payment. If you do this right full.
Speaker 3:If they are of a high net worth, a lot of people experience negative consequences. So this should be done carefully, with the right person, so that in mind you're never going to choose your financial advisor for the trustee. Don't, don't, just don't. If you need a professional fiduciary, choose one. And one of the advantages of a professional fiduciary is they have bonds or they're backed by giant financial institutions, and so if someone does steal your money, you can then sue someone and collect it back. So the and I and we see here that this guy was part of a financial institution kind of. But that's not the way professional fiduciaries work. They're not working his realm and his way. Professional fiduciary is like something like a bank and trust and they'll have certain amounts of money under management and then these people go out and they manage people's monies under these trusts.
Marshall Hunt:Okay, so we separate the jobs of trustee and say financial advisor. What else should someone do to make sure they're choosing the right financial advisor? You talked a little bit about trustees and you might look at a institutional trustee that's going to have a bond. That you know is maybe in some instances more likely to allow you to avoid these type of fraudulent behaviors. But are there other things people should be looking at? You know, are financial advisors licensed in some way? Do you have any opinion about using family, as either you know, as a trustee? What else can people do besides separating these roles to make sure they make the right choice?
Speaker 3:Yeah, there's a lot of introspection that goes on with estate planning, okay, and a lot of times we're not very honest with ourselves about our family. But let's assume that we're honest with ourselves about who our family members are and their relative intelligence, acumen and truth-telling. Choosing a family member is not a bad idea. I mean to be the trustee. They typically want to do the right thing.
Speaker 3:If this is a really super complicated trust, you may not want the family member, you may want someone else, a professional, and the reason is, let's say, that is a complicated situation. You have businesses that are in the trust, or you have complicated assets, or you have complicated distribution schemes. Your family member has to go and hire an attorney anyways, and then you're paying the attorney to really do the work, turning to really do the work. So sometimes having someone else do it might be a benefit. It depends on how much is at stake. So and it's hard right, because what you're doing is you're planning for down the road, like will this person be even around at the time? They need to assume the duties or do something in this trust role, or trustee role.
Marshall Hunt:I just got named as my my parents uh successor trustee and in their trust and I, I have the same doubts about people's ability to, you know, judge human nature that you were just expressing. I don't know if they should have chosen you.
Speaker 3:I would choose you Marshall. I would choose you Yep, you would be my favorite son, just so you know.
Marshall Hunt:All right. Hey, you know, I've met your kids. I don't know if I would say that. I don't know if I'm better than Evan, but I will tell him.
Speaker 3:You said that next time I see him um okay yeah so, but look at reputation, the community, look at the ability for that that institution that you're choosing um to survive. Uh, interview people um find out if they hold the same types of values in that institution. You never can be too cautious. Do your homework, be skeptical.
Marshall Hunt:I know sometimes there are fee-only advisors or advisors that get a percentage that's invested. The type of compensation that advisors get, I assume that probably matters too.
Speaker 3:Compensation. Yeah, that matters a lot and anyone who's ever worked as an investment advisor knows that it could just change your outlook and the financial outlook if you don't choose the right people. You need to compare rates and to the extent you could lock in a good rate with these people, you'll do it. To the extent you can. That is understandable the extent you can, and you know that is understandable. Generally, the big financial institutions or financial institutions want a percentage of the of the estate as their compensation and that could be a good thing. It could be a bad thing.
Speaker 3:When you're in that sweet spot of the amount of money under management, you have not too much funds, not too little funds. When you're in that sweet spot, it could be a real bargain to have it as a percentage. When you're underfunded, there's not a huge trust. They won't take it. Those big financial institutions just simply won't take your money.
Speaker 3:They want to see more money before they incur their liability and they want to know that the work they're going to do is going to be worth it, because they're going to work on that percentage. The work they're going to do is going to be worth it because they're going to work on that percentage. Now there's these hourly institutions. You pay them by the hour to do the work and they'll take your money, even if it's not a tremendous amount, they'll take your money typically and then they'll just use it until it's gone. And that has a benefit too. So, for example, a lot of financial institutions, when they find out there's a business involved or complicated real estate or a lawsuit heaven forbid they'll say, yeah, come back to us when you've resolved all those issues and then we'll take your money Resolve all those issues and then we'll take your money.
Speaker 3:So, yeah, you need to really be honest about what you have, and the hourly people will frequently take it with some sort of complication and then they bill by the hour. Yeah.
Marshall Hunt:Okay. So I mean you've gone through the whole thing. You've got your separate financial advisor, you got your separate trustee. You know you've done your research based on the size of your estate, you've chosen the right financial advisor. You know, let's say, your, your favored son is your trustee, and is there anything else that you think that the poor client in our example that we gave could have done to avoid disaster? Again, we're not trying to Monday morning quarterback them, like you said. It's just a sad story and it sounds like they did a lot of things right, but with the knowledge of hindsight, anything else you would have hoped that they would do.
Speaker 3:I would want to see those statements. Apparently, that guy was forging statements. Look at those statements hard. You know, bernie Madoff made fake statements for his clients and that's how he was found out. There's this guy out there. He ended up crunching the numbers on Bernie and saying you know, his returns aren't possible. This really didn't happen, and that's eventually. Someone listened to this guy or someone else who ended up setting the ball into motion and the house of cards fell. And so, similarly, look at those statements. Do these appear legitimate?
Marshall Hunt:I mean you think today you know every company has some type of online portal Can you get online and see the statements for yourself? You think that? I don't know if that was always the case in 2007, when apparently this issue that we talked about started, but you'd think that'd be a sort of trust, but verify option.
Speaker 3:Yeah, trust, but verify Right. No one cares about your money as much as you do. That's the facts. No one advisor. And even if they are amazing, you're going to put your eyes on those statements and you're going to say are these really the investments that are right for me? And then go back and do some research and find out why or why not, so you could have intelligent conversations.
Marshall Hunt:Yeah. So last question for you you're an estate litigator, you? You know, are generally the one people come to after something like this has happened and they're trying to pick up the pieces and see what they could do. In your experience, someone's been the victim of a serious financial fraud like this. Are they likely to be able to recover? How does it usually go?
Speaker 3:Yeah, this is going to be really tough, right? Um, and it's going to be multifaceted litigation. Uh, I don't know if we know know enough facts and know whether or not they're going to going to recover. Uh, but I would be looking hard at all the professionals who were involved in this and looking hard at that financial institution that was allowing this to go on and watching the $800,000 plus be dissipated in a charitable remainder trust. I mean, the whole purpose of a charitable remainder trust is that the assets there there's assets there after the given period of time has ended.
Speaker 3:You typically look at a life expectancy. You typically look at a life expectancy Say, Bob Sewell has a life expectancy of 25 years and you enter your complicated formula in. I'm not going to pretend that I do these things, but you enter a complicated formula in and you put your money in and you have a schedule for taking money out where there's now a remainder trust for the charity at the end. Collect any attorney who may have advised for a non-relative financial advisor to be the trustee. That seems like a no-brainer too. But unless that guy has assets, $1.1 million is going to be hard to collect. But fraudsters tend to spend their money. I've seen they don't. They're not savers. If they were savers, they would. They would they wouldn't need to be fraudsters.
Marshall Hunt:So yeah, and apparently the fraud that took place over the course of 12 13 years. Yeah, it's not like he was just sucking the money away. In all likelihood, All right. All right. Well, we'll end on a bit of a sad note there, and no one likes to think about someone trying to get all that money back. But we hope for the best for that client and hope for the best for Bob here. Thanks for being on and we'll look forward to speaking again soon.
Speaker 3:Thanks, Marshall.
Bob Sewell:Thanks for listening to the podcast. We'll look forward to speaking again soon. Thanks, Marshall. Don't forget, as smart as we sound and as lovable as we are, we are not your lawyers and we are not giving you legal advice. But if you need some legal advice, get some. There are some great lawyers out there and we are always ready to help. See you next time.