Unethical behavior and/or sales practices

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Jun 6, 2008 11:53 am

After being in the industry for a couple years, just about all of us have come across a situation where we have seen unethical behavior and sales practices.<?: prefix = o ns = "urn:schemas-microsoft-com:office:office" />


What is the worst thing you have seen when it comes to unethical behavior and/or sales practices?

Jun 6, 2008 12:16 pm

Index funds with a wrap.

 
 
 
 
Kidding...that was for you Ice .
Jun 6, 2008 12:29 pm

Local guys taking elderly people's "never money" and putting it into Equity indexed annuities without disclosing surrender fees/periods.

 
Then, they call them every year or so and recommend they take a portion of the money out of the annuity and 1035 it to another annuity to get a "better" rate.  They also send out hand-typed statements showing only the account values and not the true surrender value.
 
I don't know how they prevent the clients from receiving the statements directly from the insurance companies, but they do.
Jun 6, 2008 12:32 pm

[quote=snaggletooth]Index funds with a wrap.

 
 
 
 

 
Don't give them any ideas they might really try this!
Jun 6, 2008 4:44 pm

I have a client who showed me her statement and it had annuities inside a wrap account plus the broker charged her $500 per house visit!  She got hooked up with this guy in 2003 and after meeting with me in 2007, told him she was concerned with her performance.  He had the balls to say... "Your up $7,000 over the last 4 years.. thats something to be happy about."  She had $180,000 with him. 

 
A classic example of an unscrupulous broker taking advantage of the elderly.
 
 
Jun 6, 2008 4:46 pm

Wow.  I didn't even know that you could charge for a house visit...

Jun 6, 2008 4:57 pm
not_applicable:

Wow. I didn't even know that you could charge for a house visit...





If we could, Edward D. Jones would already be doing it. (Of course, the brokers wouldn't see a dime of it.)

Jun 7, 2008 12:08 pm
Philo Kvetch:
not_applicable:

Wow.  I didn't even know that you could charge for a house visit...



If we could, Edward D. Jones would already be doing it. (Of course, the brokers wouldn't see a dime of it.)

 
 
Jun 7, 2008 4:24 pm

I left to go independent Dec. 23, 1999.  I had a client - divorced man in his early 60s on disability retirement.  He had his pension and a small nest egg.  He'd never invested in the market and had no desire to.  I had him in some bond funds, a GNMA unit trust and a couple of fixed annuities.  When I left, he was uncomfortable staying with me, so he was assigned to one of the more senior brokers in the office.  Met with him in early Jan. 2000, told him that he had been losing money with my recommendations and that they were going to get him back on track.  Sunk everything but a fixed annuity that was his IRA into quity UITs - telecom, internet, wireless, technology, one small position in a medical stock UIT and one that was Dow 20.  This fellow came to me March 2002, and his portfolio (which was his entire life savings) was down 60% - and that included the fixed annuity!!  I wanted to throw up it was so inappropriate for this client.  

Jun 8, 2008 2:54 pm

3 stories

1 - Retired cop turned FA convinced a customer to let him do discretionary investments. Portfolio lost money, so FA put through an address change to a PO Box he owned and tried to recoup by buying and selling options. Was found out while on vacation when customer called manager to find out how his IBM was doing and told he no longer owned IBM. Ex cop went on to sell used cars.

2 - FA used to sell closed end IPO's to customer. If stock went up 10%, sold out and went to client with a check for profit. Convinced her a 20% tip was customary. Was found out when customer's CPA called another FA in office and told about these transactions.

3 - FA convinced client to go fee based. Then proceeded to sell only IPO's and collect IPO commission as well as fee. Left the firm when IPO's were no longer allowed in fee based accounts. Still operating as an independent.

This last one is very funny though. It happened in the firm I was then working in, but not in my office. Trainee's in this firm were usually required to do cold canvassing in their first month's after receiving series 7 license. This trainee would go up to a home and knock on the door. If no answer, he would break in and then steal what he could. He did this for 5 months before he was caught.



Jun 10, 2008 11:03 am
I guess this one isnt as good as the breaking and entering one...
Jun 11, 2008 12:50 am

-My favorite are 10-year fixed annuities that are sold at  7% first year and then drop to 3% the next year and 3-5 years later "need" to be 10-35'ed into a new contract because there is a better rate, hitting the client with a surrender and starting the process over.

 
Found an annuity this year out of CA that a client had bought in 1990.  Had a perpetual 6% surrender penalty.....that's right, the surrender penalty never goes away, making 3.5% interest.
 
How about a Merrill account I came across late last year....95% international, fortunately the client listened to me and we allocated it appropriately.
 
Came across a MSDW account around 5 years ago, 2 million.  Client was 90% PFE with the account margined 30% at the broker's request.  Told the client to diversify, didn't listen, don't know what he is up to now, other than I am sure he had his a$$ handed to him.
 
 
Jun 11, 2008 1:22 pm

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How about a Merrill account I came across late last year....95% international, fortunately the client listened to me and we allocated it appropriately.
 
I don't know that that is necessarily inappropriate if the rest of the client's holdings in other places (401K and other brokers) balance out the portfolio.  I often misallocate an account to do that if the client is overly invested in other asset classes elsewhere.  You just have to substantiate that with your compliance dept and keep a careful eye to make sure the client isn't moving his stuff around to unbalance the entire portfolio.
 
Unethical = most EIA sales.
 
I saw a broker in one of the bank branches I was at transfer a client from mutual funds that she had owned for over 15 years into an annuity, because he could make a huge commission.  Fortunately, she discussed this with her CPA who freaked out and had the trade cancelled.  She would have had over 60K in unrealized LTCG to report and this was before the cap gains rates were lowered.  It would have cost her a bundle in taxes plus this amount represented a rather large chunk of her investable assets and would have locked her money away for 10 years with a large CDSC.  
 
The broker never discussed or even inquired about how long she had owned the funds or whether there would be any tax consequences.  All he could see was a big fat commission.  If her CPA hadn't gotten involved this poor woman would have been royally screwed.
Jun 11, 2008 2:14 pm
marketguru69:
This last one is very funny though. It happened in the firm I was then working in, but not in my office. Trainee's in this firm were usually required to do cold canvassing in their first month's after receiving series 7 license. This trainee would go up to a home and knock on the door. If no answer, he would break in and then steal what he could. He did this for 5 months before he was caught.

And I would have gotten away with it too if it weren't for you meddlin' kids and that dog! 
Jun 11, 2008 4:20 pm
Spaceman Spiff:
marketguru69:
This last one is very funny though. It happened in the firm I was then working in, but not in my office. Trainee's in this firm were usually required to do cold canvassing in their first month's after receiving series 7 license. This trainee would go up to a home and knock on the door. If no answer, he would break in and then steal what he could. He did this for 5 months before he was caught.

And I would have gotten away with it too if it weren't for you meddlin' kids and that dog! 
 
Wow, my kids watch Scooby too.  I can't believe I recognized that line.  Scary.
Jun 11, 2008 4:22 pm
rankstocks:

-My favorite are 10-year fixed annuities that are sold at  7% first year and then drop to 3% the next year and 3-5 years later "need" to be 10-35'ed into a new contract because there is a better rate, hitting the client with a surrender and starting the process over.

 
Found an annuity this year out of CA that a client had bought in 1990.  Had a perpetual 6% surrender penalty.....that's right, the surrender penalty never goes away, making 3.5% interest.
 
How about a Merrill account I came across late last year....95% international, fortunately the client listened to me and we allocated it appropriately.
 
Came across a MSDW account around 5 years ago, 2 million.  Client was 90% PFE with the account margined 30% at the broker's request.  Told the client to diversify, didn't listen, don't know what he is up to now, other than I am sure he had his a$$ handed to him.
 
 
 
Well, needless to say, if he still holds all that PFE, it's like 50% of his portoflio and he's got a fat margin call.
 
You can't save 'em all.
Jun 11, 2008 8:00 pm
"Came across a MSDW account around 5 years ago, 2 million.  Client
was 90% PFE with the account margined 30% at the broker's request. 
Told the client to diversify, didn't listen, don't know what he is up
to now, other than I am sure he had his a$$ handed to him."

Normally this can be a good strategy. I have a client with  700,000 shares of PFE. He is a retired chief chemist of the company. I see a lot of this, since we work with retirees, who were formally executives of public companies. I've even seen a retired store manager of PetSmart who has $2.5MM of shares.

My preference in these cases to use an exchange fund if client is eligible first. 2nd choice is to set up CRT account with highly appreciated stock, using charitable deduction to buy life insurance to recover charitable gift to estate. Client will have to pay CG tax eventually, but it will be paid out over many years, and may never be fully paid. Alternatively,  give a gift  of a portion of stock to  charity.  Under current  CG  rates, will be able to sell about 5 shares to every share gifted  with deduction covering CG tax. 

Others have used margin loans to buy diversification. Income and options collars, should be used to pay down the margin loan. Again CG taxes have to be paid, but properly done you can spread this out over several years.



 
Jul 1, 2008 6:09 pm

A very nice old lady (late 70s) came in terribly confused about what had happened
with her AIG account (I'm an LPL rep helping service some old clients who still have AIG money). 

She had wanted to put some money into the liquid,
fixed interest rate savings account, but somehow the original deposit
along with much of the
savings account principal was transferred to the 7-year lockup,
fixed annuity.   Did I mention that there was no disclosure of the 7-year penalty and no receipt of contract?

The
lady was very thankful when I showed her the "free-out" on page 8.

It's time to call AIG customer service about it:

"I'm sorry, that's not possible, you will have to pay the full penalty."

"But I'm looking right here in the contract, page 8, the last paragraph."

"I'm sorry, we don't have access to the contract."

"You're telling me you don't even have records of sending the client a contract?"

"No sir, we don't have any record."

Time
goes on, a supervisor comes on the line, the same, memorized penalty
statements are uttered. The woman, becoming more distraught, finally
calls the agent who sold her the annuity:

"There's this thing on page 8, that says I have a free-out."

"Oh really? I didn't even know about that."

The
woman ended up getting the transaction rescinded, but not without the
effort that would keep most people over 50 from even wanting to bother. 
And from my experience, this is exactly what AIG/Valic wants. They also want
their workforce to be incompetent.

No offense to any Valic/AIG reps out there, but lately I've been hearing some terrible management stories, along with 20 year veteran reps getting weekly "beatings" and having their pay cut 50% if they can't generate another +$3 million in VALIC monies before the end of the year. 

Jul 1, 2008 9:14 pm

I'm currently having a problem with them.  We sent some transfer paperwork to them and they aren't transferring the money because they are claiming that it's not the original paperwork.  It is.

Jul 2, 2008 11:35 am

That must be the exclusive to the VALIC side of AIG.  I use AIG/SunAmerica annuities all the time and my clients love them.  They're easy to work with and very responsive when I have an issue, which is hardly ever.