In September 2008, as the financial crisis emerged, a retirement account of Al and Karin Betz slumped in value to $130,000 from about $160,000.
“I got a cold call saying, ‘Would you have some money to invest?’ ” Al Betz, 66, recalled. “I said, ‘If you can do better, I’ll give it a try.’”
The suburban Chicago couple said they were told that their principal would be protected and that they’d get high returns thanks to a “unique system.”
After the account dwindled to about $3,000, the Betzes filed a claim against the brokerage, accusing it of putting their money in unsuitable investments, such as penny stocks, which can be risky, and making excessive trades.
“When they were selling or buying, they got a certain fee,” said Karin Betz, 64. “They got richer when we got poorer.”
A lawyer representing National Securities said the firm did nothing wrong.
The Betzes’ situation is illustrative of confusion in the marketplace over the responsibility of brokers handling retirement accounts — something the U.S. Department of Labor is trying to remedy.
The agency, at the behest of President Barack Obama, wants a more demanding “fiduciary” standard required of brokers who make investment recommendations, meaning they would have to act in the client’s best interest. Currently, brokers need only consider whether investments are “suitable,” taking into consideration such factors as customers’ ages, income and appetite for risk.
At an AARP meeting in February, Obama said some advisers “receive backdoor payments or hidden fees for steering people into retirement investments that have high fees and low returns.” Such practices, he said, strip about $17 billion a year from peoples’ retirement savings.
“The challenge we’ve got right now: There are no uniform rules of the road that require retirement advisers to act in the best interests of their clients,” Obama said.
A 30-page report from the White House Council of Economic Advisers titled “Effects of Conflicted Advice on Retirement Savings,” also released in February, said people receiving conflicted advice reduce what would be a 6 percent return to a 5 percent return.
“Such savers hold about $1.7 trillion of IRA assets,” the council said. “Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.” Even a more conservative estimate — say, a half of a percentage point — would reflect losses of more than $8 billion a year, the council said.
Just last month, Securities and Exchange Commission Chair Mary Jo White told a U.S. House financial services committee that broker-dealers should be subject to the same fiduciary standard as registered investment advisers when dealing with retail investors.
Breach of fiduciary duty is the single most common cause of action alleged in arbitration cases, according to statistics from the Financial Industry Regulatory Authority, an independent, nonprofit body authorized by Congress to protect U.S. investors by ensuring the securities industry operates fairly.
“To the extent that fiduciary duties are imposed on all brokers, there’s a very good chance that might put me out of business,” said Andrew Stoltmann, a Chicago securities lawyer representing the Betzes.
In 2014, for example, 3,822 arbitration cases were filed with the Financial Industry Regulatory Authority. Of those, 2,106 alleged breach of fiduciary duty.
The Betzes, who were born and raised in Germany, came to the United States in 1980 for Al Betz’s job. An engineer by training, he worked for a global environmental technologies company for 32 years, first in Detroit and then in suburban Chicago.
Al Betz retired from the company more than 10 years ago. At that point he and his wife started Northwestern Sunrooms, which designs and builds sunrooms, and Betz Design, which makes clothing and window treatments. They became U.S. citizens in 2010.
The businesses are doing “OK,” Al Betz said.
Al Betz said the couple trusted the brokerage, including their advice to buy more shares when they were in a steep decline. “I was not about to try to second guess them,” he said.
As their accounts dwindled to about $65,000, the couple said they showed up at the brokerage’s downtown office and reiterated that they needed the money for their retirement, “which we thought to be just a couple of years away,” Al Betz said.
When the value dwindled to $3,000, he ordered the brokers to never again sell at a loss. Last year, the couple filed a claim against the brokerage with the Financial Industry Regulatory Authority.
“The ‘superior investment method,’ which in reality was nothing more than excessively trading the claimants’ accounts, wiped out virtually their entire portfolio at a time when the equity markets made significant gains,” their claim said. The couple’s investments also were heavily weighted into “small capitalization” stocks and the portfolio wasn’t diversified.
“Diversification is one of the most important strategies to decrease risk in a portfolio, which was completely necessary for customers like Mr. and Mrs. Betz, who were nearing retirement and couldn’t afford to lose these funds,” their claim with FINRA says. “The importance of diversification across different asset classes and within asset classes to decrease risk is a well-established investment principal.”
Al Betz said he trusted the brokers and didn’t consider checking them out. “I didn’t know how to go about doing that,” he said.
Relatively few investors check out their brokers, Stoltmann said. “You can do it online, but most people aren’t aware of that,” he said. “People think brokers, like doctors, CPAs and lawyers, have a duty to act in their clients’ best interest, but there’s a real disconnect between what people get and what they think they’re getting.” Most people don’t second-guess their doctors, accountants, lawyers or brokers, he said.
The Betzes, who have two sons and two grandchildren, said the money they lost equals about a quarter of their retirement savings. The rest of the couples’ retirement funds are in investment vehicles mirroring the Standard & Poor’s 500. The couple also receives Social Security.
Still, the losses have “pushed back our retirement,” Al Betz said in an interview.
The couple believe they’re entitled to damages of nearly $215,000, the amount they think their accounts would be worth had they not been mismanaged.
HOW TO CHECK OUT YOUR BROKER
How can you find out whether the person handling your money is adhering to the more stringent “fiduciary standard,” meaning they are looking out for your interests first?
Bankrate.com, a personal finance website, recommends asking your broker two questions: Are you acting under the fiduciary standard, and can you put that in writing?
The Securities and Exchange Commission also recommends doing some research that “may save you from sending your money to a con artist, an unscrupulous financial professional or a disreputable firm.”
Information about brokerage firms and individual brokers is available online through the Financial Industry Regulatory Authority’s online Broker Check feature, http://brokercheck.finra.org/. The FINRA Broker Check Hotline is at 800-289-9999. It will tell you, among other things, whether someone is a broker, an investment adviser or both, their past work history and basic details on any past complaints that haven’t been expunged. If the individual is both a broker and an investment adviser, it typically provides a link to the SEC’s investment adviser records on the individual. On that SEC page about the individual, there’s also a “View detailed report” link that gives more information.
The SEC said people or firms that get paid to give advice about securities investing must generally register with either the federal agency or their state’s securities department.
Information about certain investment advisers can be found through the SEC’s Investment Adviser Public Disclosure Program. Go to SEC.gov, click on “Education,” and click on “Check out a broker or adviser” for a list of resources.
If you do not see a firm listed through IAPD and you want to check the firm’s registration status, contact the SEC at (202) 551-6825.
At Illinois’ Securities Department website, click on “Administration actions.” It enables you to search whether the state has taken action against an individual or firm.