Category Archives: Investor Education

The price of gold has had an amazing run over the past decade. But as gold investors are now learning, those days may be a thing of the past.

Gold investor Jon Norstog knows this reality first hand. A $29,000 investment that Norstog made in 2011 is now worth about $17,000, a 42% loss.

“I thought if worst came to worst and the government brought down the world economy, I would still have something that was worth something,” said Norstog, 67, in an April 2013 story by the New York Times.

For a countless number of investors like Norstog, the idea that rising gold prices are no longer a sure thing is a hard one to grasp. Making matters worse is the fact the financial industry seized on the idea that gold would always be the pinnacle of great investments – not to mention a forever safe haven – to market a growing range of gold investments, including government-minted coins, publicly traded commodity funds, and mining company stocks, according to the New York Times story.

But $5 billion that flowed into gold-focused mutual funds in 2009 and 2010, according to Morningstar, helped the funds reach a peak value of $26.3 billion. Since hitting a peak in April 2011, those funds have lost half of their value, the NYT reported.

Indeed, after gold prices reached incredible highs two years ago, they’ve fallen fast. The price of bullion soared to more than $1,900 an ounce in August 2011; on Aug. 6, 2013,  gold prices were less than $1,300 an ounce.

“Gold is very much a psychological market,” said William O’Neill, a co-founder of the research firm Logic Advisors, in the New York Times story. O’Neill told its investors to get out of all gold positions in December after recommending the investment for years. “Unless there is some unforeseen development, I think the market is going lower,” he said.

Every year, more investors watch helplessly as their retirement savings vanish because of investment fraud. Many of these individuals are elderly investors 65 years of age or older. According to researchers, scams from Ponzi schemes to frauds involving bogus private placements and promissory notes cost U.S. seniors $3 billion a year.

Just this week, the Securities and Exchange Commission (SEC) filed fraud charges against an Indiana man accused of stealing millions of dollars in retirement savings from clients. The SEC alleges that John K. Marcum of Noblesville, Indiana, and Guaranty Reserves Trust LLC used clients’ money for personal use and to fund a bounty hunter reality TV show.

Marcum Cos. LLC was named as a relief defendant in the SEC’s case. Marcum is the principal of both Guaranty Reserves and Marcum Cos.

“Marcum tricked investors into putting their retirement nest eggs in his hands by portraying himself as a talented trader who could earn high returns while eliminating the risk of loss,” said Timothy L. Warren, Acting Director of the SEC’s Chicago regional office, in a statement.  “Marcum tried to carry on his charade of success even after he squandered nearly all of the funds from investors.”

The SEC says that Marcum allegedly raised more than $6 million from at least 37 investors by selling investments in Guaranty Reserves Trust. Clients were allegedly told by Marcum that their principal was guaranteed and their proceeds would earn large returns from day trading. In addition, Marcum allegedly provided investors with account statements showing that he had used their money to achieve annual returns of more than twenty percent (20%), with no monthly losses. Marcum also reportedly told his clients that he would use their money to earn strong returns by day-trading in stocks.

In reality, Marcum did very little actual trading, and when he did, he suffered significant losses. Instead of day-trading, Marcum used his investors’ money as collateral for a $3 million line of credit for himself. Marcum turned to this line of credit to finance several start-up businesses, including a bridal store, a soul food restaurant and bounty hunter reality television show. Marcum also used investor money to finance his lavish lifestyle, which included luxury car payments, airline and sporting event tickets, expensive meals and hotel stays, the complaint states.

In the complaint, the SEC says that Marcum assisted many of his investors in setting up self-directed IRA accounts at several trust companies. The investors gave Marcum control of their assets by either rolling their existing IRA accounts into the newly-established self-directed IRA accounts, or by transferring their taxable assets directly to brokerage accounts which Marcum controlled.

Marcum and certain investors then co-signed promissory notes created by Marcum and issued by Guaranty Reserves Trust, which were then allegedly placed into the IRA accounts, the SEC says. The notes were securities and stated that the individual is making an “investment” with GRT. The promissory notes also repeatedly stated that the securities are “asset-backed,” “secured” and “guaranteed,” and promise the payment of interest based on “100% of the asset’s performance.”

Marcum’s scheme, which began in 2010, began to unravel in mid-2013, when certain investors began demanding distributions. Marcum could not comply, because virtually all of his investors’ money was gone. Faced with the reality of being unable to honor investor redemption requests, the SEC alleges that Marcum provided investors with a “recovery plan” that revealed his intention to solicit funds from new investors so that he could pay back his existing investors.

In June 2013, the SEC says Marcum had a phone conversation with three investors in which he admitted that he had misappropriated investor funds and was unable to pay investors back.  During this call, Marcum begged the investors for more time to recover their money, the SEC alleges. According to the complaint, Marcum offered to name these investors as beneficiaries on his life insurance policies, which he claimed included a “suicide clause” imposing a two-year waiting period for benefits.  Marcum suggested that if he was unsuccessful in returning investors’ money, he would commit suicide to guarantee they would eventually be repaid.

The SEC obtained an emergency court order to freeze the assets of Marcum and his company.

A recent editorial by Investment News addresses a newly introduced bill intended to end the mandatory arbitration clause found in contracts between financial advisers and their clients.  Rep. Keith Ellison, who introduced the bill, says he believes that doing away with mandatory arbitration could begin the process of rebuilding investor trust in Wall Street.

“Investors want to get back in the market, but they’re rightly wary that the game is rigged against them,” Ellison said in a statement after introducing the bill. “Investors shouldn’t have to sign away their rights in order to work with a financial adviser or broker/dealer. By removing some of these unfair advantages, consumers will be more eager to invest, which will create jobs and strengthen the economy.”

The mandatory arbitration clauses are standard in brokerage contracts and often included by registered investment advisers. Specifically, the clauses dictate that any client complaints must be settled in binding arbitration instead of the courts.

As the Investment News editorial correctly points out, there are other reasons to get rid of mandatory arbitration, not the least of which is the fact that investors should not be required, as they are now, to relinquish their legal rights in advance of a future complaint with their broker. Such a requirement does nothing to instill trust and faith in Wall Street.

In reality, as of three years ago, the Securities and Exchange Commission (SEC) has had the authority to end, or at the very least, limit mandatory arbitration under the Dodd-Frank Act. But the SEC has yet to make a move in that direction.

This summer, one SEC member – Luis A. Aguilar – went against the tide and introduced a bill to kick start the process. That bill, the Investor Choice Act of 2013, is strongly supported by several investor protection and financial groups, including the North American Securities Administrators Association (NASAA), which believes that inclusion of mandatory arbitration provisions in broker/dealer and investment adviser customer contracts denies many investors the ability to pursue legitimate claims against fraudsters.

“Investors deserve better than the current ‘take-it-or-leave-it’ approach to securities dispute resolution. Rep. Ellison’s legislation will ensure that investors have the unencumbered right to seek redress in the appropriate and desired forum,” said Heath Abshure, NASAA President and Arkansas Securities Commissioner, in a statement.

The bottom line: If the investment world hopes to restore the trust of investors – and create true financial reform – it needs to act in their best interests. Period. Ending mandatory arbitration is a beginning.

Advertising for private-placement securities offerings has been given the green light to move forward following approval by the Securities and Exchange Commission (SEC) last week.

In a 4-1 vote, the SEC’s action opens the door for private-equity funds, hedge funds and brokers selling unregistered securities to market the investments to the general public.

Sales will be limited to accredited investors, who are defined as individuals with a net worth of at least $1 million, excluding the value of their home, or earn at least $200,000 annually. Nearly 9 million U.S. households meet the net-wealth criteria to be accredited investors.

As reported July 14 by Investment News, as the general public is introduced to private-securities offerings through advertising, investment advisers are likely to see more demand from clients who want to take advantage of such opportunities. That then puts the onus on advisers to evaluate these often-risky and complex investments and decide whether their clients have the sophistication to thoroughly understand the risks they are taking on.

“It does put more onus on an adviser to make sure someone is an appropriate investor,” said Jennifer Openshaw, president of Finect, a compliant social-media network for the financial industry, in the Investment News story.

“Today, it’s easy to meet the $1 million threshold as an accredited investor,” she added. “But that doesn’t mean they’re sophisticated.”

The SEC’s ruling implements a provision of a law that was enacted in April 2012 – the Jumpstart Our Business Startups Act. The measure eases securities regulations for small companies.

Supporters of the law say it will help entrepreneurs raise capital. Critics, however, contend that the SEC is lifting the advertising ban without including sufficient measures to protect investors. In response to those concerns, SEC Chairman Mary Jo White recently offered a separate regulatory proposal designed to tighten the rules surrounding private-placement solicitation.

The one dissenter of the SEC who voted against dropping the 80-year-old ban on advertising is skeptical about the potential investor safeguards.

“Any protections from today’s proposal will come too late – if they ever come at all – for investors,” said SEC member Luis A. Aguilar. Aguilar added that the SEC is moving “recklessly” and is “allowing fraudsters to cast a wider net” through private-placement advertising.

A. Heath Abshure, Arkansas’ securities commissioner and president of the North American Securities Administrators Association, echoes those sentiments.

“The decision to lift the ban without simultaneous adoption of appropriate limits, guidance and investor protections for the most common product leading to enforcement actions by state securities regulators underscores the prospect that investors and issuers alike will be exposed to an indeterminate gap in protection,” Abshure said in a statement.

Incidents involving bad brokers or corrupt financial reps are becoming increasingly common. Most recently is the case of a mutual fund executive in Florida who promised investors early shares of Facebook and Groupon but instead used their money to buy himself lavish cars, a waterfront home and expensive jewelry.

The individual, John Mattera, was sentenced to 11 years in prison.

As reported June 21 by the Associated Press, U.S. District Judge Richard Sullivan ordered Mattera to forfeit $11.8 million. An additional restitution amount will be set within the next month.

“You’ve left a lot of wreckage in your past and you have to be punished for that. These crimes were just so selfish, so callous toward the victims,” said Judge Sullivan in addressing Mattera.

Mattera was arrested in November 2011 on charges of conning more than 100 people who invested millions of dollars with his British Virgin Islands-based Praetorian Global Fund Limited. He pleaded guilty in October to conspiracy, securities fraud, money laundering and wire fraud.

One of Mattera’s victims, Marisa Light Cain, was present at Mattera’s sentencing hearing. She stated that Mattera squandered the $100,000 she had saved to pay for college for her two sons.

Mattera has four previous convictions for similar crimes in Kentucky and Florida. He has been imprisoned since his guilty plea, a proceeding that was delayed by a day when he missed his flight from Florida. He also was found in contempt in a civil case brought by the Securities and Exchange Commission (SEC), according to the AP story.

The bottom line: Investment scams and fraudulent investments come in many forms. Falling victim to a scam can mean losing anywhere from a few hundred dollars to your life savings. At the end of the day, if the investment offer sounds too good to be true, it probably is.

Alternative mutual funds have exploded in popularity in recent years. But there is a dark side to alternative mutual funds. Last week, the Financial Industry Regulator (FINRA) warned investors about this very issue, cautioning them in an Investor Alert titled “Alternative Funds Are Not Your Typical Mutual Funds.” Among other things, the alert stressed the complex trading strategies and the unique characteristics and risks associated with alternative mutual funds.

“The strategies alternative mutual funds employ tend to fall on the complex end of the spectrum,” FINRA said in its Investor Alert. “Examples include hedging and leveraging through derivatives, short selling and ‘opportunistic’ strategies that change with market conditions as various opportunities present themselves.”

As their name implies, alternative mutual funds are quite different from their traditional counterparts. Alt funds typically use more exotic strategies, including options and leverage, as well as more complex asset mixes.  Alternative funds might invest in assets such as global real estate, commodities, leveraged loans, start-up companies and unlisted securities that offer exposure beyond traditional stocks, bonds and cash.

Some alt funds employ a single strategy. For instance, they may offer 100% exposure to currencies or distressed bonds. Some funds might employ a market-neutral or “absolute return” strategy that uses long and short positions in stocks to generate returns. Others may employ multiple strategies such as a combination of market-neutral strategies and various arbitrage strategies. Still others are structured as a fund containing numerous alternative funds or a special type of “fund of hedge funds,” according to FINRA.

Although the strategies and investments of alternative funds may appear similar to those of hedge funds, the two should not be confused, FINRA says. Alternative mutual funds are regulated under the Investment Company Act of 1940, which limits their operations in ways that do not apply to unregistered hedge funds. These protections include limits on illiquid investments; limits on leveraging; diversification requirements, including limits on how much may be invested in any one issuer; and daily pricing and redeemability of fund shares.

FINRA cautions investors who are considering investing in alternative mutual funds to carefully consider their investment objectives, performance history and fund manager of alternative funds before doing so.

Investors in some states have a lot to learn when it comes to investing and financial literacy, says a recent study by the Financial Industry Regulatory Authority (FINRA).

According to the study, residents of California, Massachusetts and New Jersey are the best at handling their money. By comparison, individuals in Mississippi, Arkansas and Kentucky rank at the bottom of the list.

“This survey reveals that many Americans continue to struggle to make ends meet, plan ahead and make sound financial decisions – and that financial literacy levels remain low, especially among our youngest workers. No matter how you slice and dice it, this rich, new data set underscores the need for us to continue to explore innovative ways to build financial capability among consumers,” said FINRA Foundation Chairman Richard Ketchum.

Overall, the number of respondents demonstrating a high degree of financial literacy – meaning they correctly answered four or five of the five questions about financial knowledge – dropped to 38% in 2012, from 42% in 2009.

About half of survey respondents said they worked with a financial professional in the past five years. However, they still lacked knowledge of key financial market concepts, the study found.

For example, only 28% correctly answered a question about the movement of bond prices, compared with interest rates. Less than half correctly answered a question about the risk of a single company stock versus a diversified mutual fund.

Study responses were collected through an online survey of 25,509 American adults (approximately 500 per state, plus D.C.), over a four-month period from July to October 2012. The sample used in the study was weighted by age, gender, ethnicity and education. The full data set, questionnaire and methodology are available here.

Alternative investments like non-traded REITs and private placements have levied financial havoc on many investors in recent years. Now, facing pressure from regulators, some broker/dealers are making changes to how they sell these kinds of products.

Earlier this year, VSR Financial Services, Berthel Fisher & Co. Financial Services and the Cetera Financial Group Inc. announced revisions to their policy guidelines and procedures regarding sales of certain alternative investments.

As reported May 16 by Investment News, such action could lessen the amount of alternative investments that clients can hold in their accounts at any one time.

The changes particularly impact illiquid alternative investments. Because these types of investments are not traded on a national securities exchange, investors have little or no ability to sell their shares if they need immediate access to cash.

The changes that some B-Ds are making in regards to illiquid investments are not entirely unexpected. The Financial Industry Regulatory Authority (FINRA) has heightened its scrutiny of these products in recent years, issuing several bulletins warning investors about the hidden risks they may pose.

Recent news concerning alternative investments occurred in February 2013, when broker/dealer LPL Financial LLC agreed to pay restitution of $2 million to Massachusetts investors who bought seven non-traded REITs, as well as a $500,000 administrative fine. In December, Massachusetts Commonwealth Secretary William Galvin had charged LPL with failure to supervise registered representatives who sold the non-traded REITs in an alleged violation of both state limitations and the company’s rules.

For now, some broker/dealers, including VSR, are scaling back the amount of illiquid alternative investments that clients can hold in their accounts, particularly the elderly, said Don Beary, VSR chairman, in the Investment News article. “FINRA in the past year did a ‘senior sweep,’ and we’ve had guidance that we have to be careful about what seniors buy,” he said.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.

Choosing a financial adviser is a big deal. These individuals are responsible for giving you advice about how to save, invest, and grow your money. A good financial adviser can put you on the path to a solid financial future, while others may steer you in the wrong direction.

As with anything that relates to your investments, it’s important to thoroughly do your homework so that you choose a financial planner who is right for you and your financial future.

Anyone can advertise themselves as a financial adviser.  But simply saying you are a financial adviser doesn’t make you a legitimate expert. One of the most reliable credentials to look for is the CFP designation (which stands for certified financial planner). CFP means a person has successfully passed a rigorous test administered by the Certified Financial Planner Board of Standards.

Other tips to consider when choosing a financial planner is to ask about the adviser’s pay structure.  In most cases, investors should avoid commission-based only advisers because these individuals may not always have a client’s best interests at heart. Rather, some may push certain financial products that benefit them via hefty commissions.

Conduct personal interviews with three or four prospective financial planners. Have a list of questions ready, including inquiries about the adviser’s investing philosophy. Be sure to ask  if the adviser has ever faced an investigation by regulatory groups such as the Financial Industry Regulatory Authority or the Securities and Exchange Commission (SEC). You can check the compliance record of advisers and firms here.  Also, ask for references of current clients whose investment goals are similar to yours.

Be on the lookout for red flags. This includes marketing hype by advisers who tout so-called investment guarantees. No one can make a guarantee when it comes to investments. Every investment contains some level of risk. If a financial adviser says he or she can outperform the market each and every time with a particular investment, it’s probably best to walk away.

The SEC offers several resources and additional questions to ask about selecting financial advisers. You can view that information here.

A PBS documentary had harsh words for financial advisers, blaming them for many of the struggles facing Americans today as try to save for their retirement. In The Retirement Gamble, Frontline correspondent Martin Smith investigates what happened to retirement in America and the role that financial services companies may be playing in draining your savings year after year.

Among other things, producers of The Retirement Gamble cite fees that financial advisers charge investors in their 401(k)s – largely made up of mutual fund fees and commissions – as one of the biggest obstacles behind the retirement savings crisis.

The documentary also criticizes advisers for boosting their own income by steering investors into high-fee investments like actively managed mutual funds. In an April 24 article by Investment News, Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, says the term “financial adviser” means almost nothing in today’s investing world. “It could be a financial planner,” she says in the article. “Or it could be a broker who is a salesman.”

Indeed, a recent AARP study showed that 70% of mutual fund savers were unaware that they were paying any fees at all.

Teresa Ghilarducci, an economist at The New School, was equally condemning of financial services representatives and their firms. “Basically, your guy is out for himself to maximize his sales, and the way he does it is to be loyal to the mutual fund,” she said in the documentary. “They try to sell you the most profitable products.”

More on The Retirement Gamble can be found here.