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A cautionary tale for the high-net-worth investors

"The special handling they are giving you is merely the anesthetic that precedes the surgical removal of your wallet" - Phil DeMuth, Author.

John is a multi-millionaire business owner. He has a number of accounts with M, the storied brokerage firm that paid their senior executives $4 billion in bonuses last year. Three of his accounts lost a great deal of money, not due to the market crash but to conflict of interest.

Double dealing in Treasury

John has a Treasury account where his wealth manager purchases Treasury bills, notes and bonds for him. Last year was a great year for Treasury securities - the market turmoil caused investors to flock to them, driving prices up more than 10%. John's account, however, lost 3%. How could this happen? Conflict of interest. M is a primary dealer in the Treasury market. They buy Treasury securities and resell them to their customers at a markup. It looks like the markup is so high it takes away all the customer profit.

Churning stocks

Last year, the S&P 500 index lost 38%. John's stock account lost 62% by buying and selling largely S&P 500 stocks. How could this happen? Conflict of interest again. M is a brokerage, so the more trading of John's stocks, the more commission they earn. No wonder there are hundreds of odd-lot bit-size trades in the account: John's year-end statement was 377 pages long! .

Hedge funds and private equity

M likes to tell their wealthy customers that they can put them in investments not available to the rest of us. Sure enough, they put nearly 40% of John's money in a hedge fund. The good news is - the hedge fund is "making money." The bad news is - the results are not audited, not even calculated by a third party, so the money may or may not be real. When I checked the SEC database, I found no record of either the fund or the fund manager.

I asked John, who is a good businessman: "Would you get into a partnership with someone you don't know in which you contribute money and that someone makes all the decisions and does the accounting as well?" John said, "Of course not." John was not aware his wealth manager put his money into just such a partnership for a rich referral fee. (Note: all hedge funds and private equities are organized as private limited partnerships exempt from regulation.)

Free 2nd opinion review

Unfortunately, John's experience is all too common among high-net-worth investors. According to FINRA, 88% of self-proclaimed advisors are salesmen on commission, who are incentivized to maximize the firm's profit. If you are like John, it behooves you to make sure your advisor is not one of them. Click to schedule a 2nd opinion review with us.


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