As I recall it, AUM percentage fees on the retail level was created by Jim Lockwood and John Ellis when they proposed retail money management to EF Hutton in 1973. The “wrap fee “ was born.

On May 1, 1975 when the SEC mandated the death of high commissions, the stage was set for the growth of the AUM % fee. It took until 1988 to really start to grow. It hasn’t changed much in 30-40 years. Now, half a lifetime later, the DOL in their infinite wisdom thinks that AUM percentage based fees are a better way to go conflict free for retirement accounts. Not much thought went into that, did it? Still, even today some financial advisors are talking about going to fee-based advisory business as if it were the latest thing since sliced bread.

Starting in the 70s Brokers were sold on “annuitizing their business” Only $10 million is client assets at let’s say 2% all inclusive (commissions, management and consulting) would generate $200,000 gross to the broker, which translates to pretax net to the broker $90,000 every year they keep the client. And if the account grew 10% a year….

The client sale was:

“Now I sit on the same side of the table as you, the client.” (Frankly, that would make me uncomfortable). “The only way I get paid more is if your portfolio goes up” (Or if you put more in, and give me your business, retirement, custodial accounts….) “We’re conflict free”.

I beg to differ.

However, The preponderance of retail asset management business today is charged a percentage of assets managed. NAPFA, the National Association of Personal Financial Advisors touts the fact that their members are not conflicted because,”No other financial reward is provided by any institution— which means that the advisor does not receive commissions on the actions they take on the clients’ behalf. Compensation is based on an hourly rate, a percent of assets managed, a flat fee, or a retainer.”

Lets think about it.

Is there an incentive for an Advisor to keep fee accounts under advisement even when it may not be the best idea for the client? What about advising a client on taking early social security benefit payments rather than withdrawing from their managed portfolio? Or, not buying an immediate annuity that may be appropriate rather than that portfolio withdrawal? There is an inherent conflict in that the broker/advisor is financially invented to encourage you to keep your account managed. The biggest retail asset management firm in the country, Hutton Sheraton Smith Barney Morgan Stanley (or whatever they’re called now) had a question on account closing forms, “why is the client closing this account? “Because they don’t like me” was never the right answer. But, I digress.

In an AUM fee based account, if the investor’s account grows, they pay more. Does it take more work to manage a $2 Million account that it does a $1Million account? In today’s model driven investment world, you know that answer. Does it make sense for a client to pay a percentage of assets under management year in and year out for a passive portfolio of index funds of ETFs—maybe a rebalancing once in awhile?

Should an investor pay a percentage of assets for financial planning? According to Cullen Roche, “ Paying someone 1.5% to help you “manage” a portfolio of Vanguard index funds (in which he will actively choose your allocation) is really no better than paying a stock picking mutual fund 1.5% to manage your assets. Yet it is regularly sold as something that’s “passive” and superior when all it really is is more high fee salesmanship.

How does an investor rationalize paying a percentage of assets under management if the Advisor is only making non-discretionary recommendations which the investor can freely reject?

There is no rational relationship between the assets under management and the complexity, skill and time it takes to manage a portfolio, unless the advisor is a true stock picked with customized portfolios built around the needs and wants of each client. Maybe even not then. It’s even a further disconnect if the Advisor is not the investor’s discretionary manager. Look at the relationship between AUM and fees according to the Bloomberg chart below. Even on a graduated grid Advisors get paid more as assets grow. It just doesn’t make sense.

So, accept it or not, AUM fees are fraught with conflicts.

For decades, financial advisors have wanted to be regarded as members of a profession, but how do professionals get paid: CPAs? Attorneys? Doctors? The answer is generally based on the amount of work they do, hourly fees, fixed fees or retainer fees. It’s time Advisors got paid like professionals. It’s time to ditch the asset based fee.

Here are ways for Advisors to charge retainer-based or fixed fees:

1. A flat fee per account for all financial planning, asset management, rebalancing and reporting. Let’s say $4500, for instance.

2. A base fixed fee for planning, management, advisory services with incremental fixed fees for additional services like trusts and number of tax returns they had, as well as other time consuming activities like monitoring defined benefit plans or evaluating service providers. It’s the market basket approach.

3. Charge clients a flat fee based on the amount or work the Advisor actually has to do. Not hourly, but different clients with the same assets and different requirements pay more or less, depending. (Not dissimilar to #2)

4. Hourly. Sure an accounting nightmare, but also fair.

Would this benefit investors? It’s more predictable. It’s in line with other professions. It creates fewer inherent conflicts. It enables investors to evaluate their advisors on services rather than performance, which is mainly market-based anyway. Does it mean lower fees for investors? Probably not much, and in some cases it may be higher, but the investor will know exactly what they’re paying for what they get ( and vice versa). Besides it gives investors a more concrete reason to fire an advisor rather that a variable reason.

Contrast that with the reasons why asset-based fees are the better choice for investors. Because it is cheaper than paying commissions? Think again. In the days of model driven portfolio management, the availability of investor research (like at Seeking Alpha, for instance), and $7.95 trades at Scottrade, et cetera, the conclusion is somewhere between “not always” and “not often”

So will this argument result in a fundamental change in the way investors are charged. Not likely because the vast financial service industry led by big firms has a lot invested in AUM pricing. Warren Buffet said, “Wall Street markets are so big, there’s so much money, that taking a small percentage [of assets] results in a huge amount of money per capita in terms of the people that work in it. And they’re not inclined to give it up.” The chance of a wholesale change in pricing methodology at bigger firms is slim. Boutique and independent advisory shops, though would do well to adopt a fixed model, and some have.

More will. I’d like to hear your thoughts.

DIE EARLY: One solution to the Retirement crisis Facing Americans today

Will Rogers “Don’t gamble; take all your savings and buy some good stock and hold it until it goes up; then sell it. If it don’t go up, don’t buy it.”

Woody Allen “A stockbroker is somebody who invests your money until it’s gone.”

Willie Sutton “I rob banks ‘cause that’s where the money is.”

In 2017 April is Financial Literacy Month. Imagine that, our Federal Government dedicated an entire month for a nation experiencing the highest debt ratio and lowest saving rate combination since 1933. I intend to celebrate by cutting up my girlfriend’s credit cards. This country is in the midst of a Retirement crisis that only Doctor Who and the TARDIS can solve.

American workers who think they can retire are in trouble.

The personal savings rate is now at 5.7%, well below the 60 year average. Personal Savings in the United States averaged 8.32% from 1959 until 2016, reaching an all time high of 17% in May of 1975 and a record low of 1.90 % in July of 2005. 2005 was the lowest saving rate since since the Great Depression. (About the Great Depression—ask your parents who may remember what their grandparents had to say about it.) We haven’t improved much since 2005.

It is estimated that 10 million Americans do not use insured banks. (See “Great Depression”). 75 million Americans are “credit challenged” (i.e. ass over heels in debt) and 37% of American workers aren’t saving for retirement (see “The Demise of Social Security” coming in 2038.)

62% of Americans have less than $1000 in savings, and 21% have none. The average American has $152,000 in investible assets, but don’t be misled by average. Averages are skewed by those at the higher end. The median household has $8,100 in savings but is $13,000 in debt, not counting mortgages. That is to say if there are 200 million households in the U.S., 100 million have less than $8,100 in investible assets. And, they have more debt than assets.

But, the endemic problem goes much deeper than these superficial statistics. It is in the area of “good news” that financial catastrophes are germinating. The good news is that Americans have a high likelihood of living longer. The “bad news” is that they will not have any money to sustain themselves.

The London Center for Longevity Studies announced that the first person to live to 1000 has already been born. The expected lifespan of an average 30 year old TODAY is 120. In 2016, the average retirement age is 63 years. The average age of the second to die of a couple is 92! 65% of today’s 65 year olds will reach 85 years of age or more. This year, the first group of Boomers turned 70. Are they on the beach, yet? No.

Americans have simply not yet been taught to think in terms of a 20 or 30-year retirement. At 3% inflation, in 30 years, we’ll need $2.45 for every $1.00 we need in 2016. The risk of dying too young has been replaced by the risk of living too long.

The soon to retire or even planning to retire have no idea of the magnitude of their financial shortfall. They can’t imagine being 92 or how they get there. It’s expensive to golf every day for 30 years. As a response to the lifestyle challenge, some 50 colleges so far have established (or are establishing) communities that span homes to hospice. Basically they are “Retire to Die” communities.

Today they cost $200,000 to $600,000 to enter, plus $1500 to $4000 per month. In 2038, they may cost $1.5 million and $10,000 per month. Today’s worker may need to forget about leaving a legacy to their kids or favorite charity. They may need to go back to work and stay there until they die.

Excerpt is taken from the series, Die Early from “RetirementCulture” at ©Lohr, 2016


horses On Thursday, October 27, 2016 the Department of Labor issued its first series of FAQs regarding their Conflict of Interest Rule, due to be implemented April, 2017.

Most of the FAQs deal with the BIC Exemption (Best Interest Contract) which is generally applicable to Broker-Advisors, not RIA only firms. Some highlights follow.

For a full report from the DOL see our website,

As we have stated before, if they satisfy certain conditions advisers and their firms can continue receiving compensation such as commissions, 12b-1 fees, and revenue sharing. They can sell or buy for retirement accounts certain debt instruments out of firm inventory. Ordinarily a principal transaction, even in bonds would be prohibited. Note, this is not a blanket permission slip on ALL principal transactions (ie; stocks)
While the rules first apply on April 10, 2017. there is a transition period extending until January 1, 2018. During the transition period, advisers and their firms will have to:
– Give advice that is in the “best interest” of the retirement investor.
(prudence and loyalty).
– Under the prudence standard, the advice must meet a professional
standard of care.
–  Under the loyalty standard, the advice must be based on the interests of
the customer, rather than the competing financial interest of the adviser or firm;
– Charge no more than reasonable compensation;
– Make no misleading statements about investment transactions,
compensation, and conflicts of interest.

The firm must also provide a notice to retirement investors that, among
other things, acknowledges their fiduciary status and describes their
material conflicts of interest. They must also designate a person
responsible for addressing material conflicts of interest and monitoring
advisers’ adherence to the impartial conduct standards.

The good news (yes, there is some) is the during the transition period, the
DOL will emphasize assisting (rather than citing violations and imposing
penalties on) plans, plan fiduciaries, financial institutions and others who
are working diligently and in good faith to understand and come into
compliance with the new rule and exemptions. Don’t just do nothing,
though. The BIC exemption does not apply to roboadvisors, though. In justifying and explaining this decision the DOL showed its lack of understanding of just what they were.

The BIC exemption DOES apply to insurance agents who who sell fixed
rate and fixed indexed annuities to retirement investors, as long as they:
• Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:

  • Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
  • Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm;
  •  Charge no more than reasonable compensation; and  Make no misleading statements about investment transactions, compensation, and conflicts of interest.

(Sound familiar?)
Then, there are pages and pages of requirements about compensation.
Our heads are spinning. We’ll go into more detail on Tuesday, if you
want, but, basically:

The retirement customer can ask for a complete, exhaustive accounting of
all fees (and you have to give it). You can’t do something just to enhance your compensation. Sales bonuses, contests and cash awards are disallowed, if they are intended (or reasonably expected) to cause the Advisor to recommend an investment not in their best interest. Try to enforce that one, DOL. Firm compensation schemes are under scrutiny.

IE: make sure the “grid” does not favor one investment over another, so that the advice would not be in the client’s best interest. Level fee advisors (Fixed: not rising or lowering based on assets) are good guys.

There’s more, but we have to go, it’s oats hour.
Nancy Mustang and Marilyn Paint
Stay Tuned…


The Financial Advisory business is awash with knee jerk reactions, fear and loathing, discontent and uncertainty because of the DOL Fiduciary rule. It was to be expected. The DOL in typical regulator fashion issued a long, long text document which repeats itself several times, and provided no interpretation or guidance. Historically the DOL has refused to tell ERISA Plans and Advisors How to comply. They repeatedly said something like, “You make your own judgement and after the fact if we think you’re wrong, then we’ll get your ass.” They did say this time that “sometime soon” they’d come up with some guidance. I can hardly wait. This is what happens when you have junior lawyers writing something that impacts a business.

In the meantime you can hear or read: 67% of insurance financial advisors expect to lose some or all of their low to middle income clients. Another 17% of these same advisors have no idea how they would be affected. 29% of Advisors think it would be an “opportunity.” Do you think they were already fee based fiduciary advisors? 10% of Advisors are considering leaving the business. 18% of advisors were “reconsidering their careers”. The fund business will change dramatically in fees and share classes. The annuity business will die. The Brokerage industry will lose $11 Billion in revenues in the next 4 years, even without the help of Wells Fargo. Independent IBD’s will lose $350 Billion is assets. ETFs will soar. Smaller accounts will gravitate to robo-advisors? There is an increase in Advisors and smaller brokerage firms outsourcing their 401k business. The DOL said they “want to hear from Advisors about any struggles they’re experiencing trying to understand the rule and how to comply”. No way they have enough call center employees to field that volume of calls. So, what does an Advisor or brokerage firm do:

1. Drop out of the business? Some will

2. Start a Robo-advisor? Bad idea

3. Quit selling insurance? Some will

4. Look real hard at ETFs, so you don’t get left behind? Bandaid

5. Nothing? Loser

6. Pay off your debt in anticipation of a pay cut? Maybe

7. Move all the business to fee-based and assume a fiduciary role? Best solution

8. Something else?

Probably One firm has a great idea, from a business perspective: State Farm. Starting in April, 2017 they will only sell and service mutual funds, variable products and tax qualified bank deposit products through a self-directed customer call center. No, it doesn’t help Advisors, but its a good business decision. Still their financial advisors can concentrate on insurance and fee-based fiduciary products, if they allow it.

Quandary? Yes. Easy to solve? Yes. Complying with the Rule is not that complicated despite what those lawyers hypothecate about.

Broker or Advisor, make prudent decisions that are justifiable as being in the client’s best interest. Specifically:

Disclose all the fees (Yes, including yours). No “double dipping (You can’t collect a 12b-1 fee and an advisory fee on the same account.)

Have a documented process to discuss with your client an IRA rollover from a 401k. Forget about A share mutual funds.

Broker: The BIC exemption is not rocket science, and if you have an ethical approach to your business, you can comply with it. Specifically: You can still sell commissioned products to Plans and participants. Sure, you might have to have a few more disclosures such as telling clients how much you actually make on the transaction. You still have the “Best interest consideration that better be documented”.

Like I said earlier, if you don’t want to disclose your fees, maybe you should consider a sales job at Shoes R Us in Paintball, Arkansas. You’ll need a new contract. We have a template. You will need website disclosures. You can still sell REITS, Hedge funds or annuities to a retirement plan. It requires a process and meeting the best interest test. “Fiduciary” is nothing to run from. All those independent IAs that have been selling that “they are a fiduciary and brokers are not” will now have no competitive advantage. STEP UP!

Our disclosure: We have all you need to know about the DOL Rule in 2 pages in “DOL Rule Abstract”, the Edward Jones plan, comments on other BD/IAs, and a process development detailed plan on our website See the resources section. We have the definitive Fiduciary advantage book The Fiduciary Sale, revised edition out next month, and a collection of 6 page guides that tell you exactly what to do in print in November.

Stay Tuned…


by John Lohr


It wasn’t a fraud, but the family impact was worse. A UPS employee died after his last day of work, but before he officially retired, but his family was not allowed by UPS or the Court in Massachusetts to collect on 10 years of annuity payments from his retirement plan. The Court did say it regretted the “heartbreaking” outcome. I’m sure the heartbroken family appreciated the Court’s sentiment. Dante’s Heat Index: 10+ (off the charts).


The Securities and Exchange Commission has been running a big ad on their website: “WHISTLEBLOWER REWARDS TOP 100 MM.” Actually, now more than $111 Million so far. Just last week the SEC announced an award of more than $4 million to a whistleblower whose original information alerted the agency to a fraud. On a related note several firms that were ratted out tried to retaliate against the whistleblower (even though it’s supposed to be anonymous?) They lost and were hit harder. Keep it up. Since inception in 2011, there have been only 34 secret tips. There have been hundreds of frauds reported. How many more are out there? I’m glad it’s anonymous. Dante’s Heat Index: The SEC gets air conditioning for this.


Hills Silica Company Gordon W. Jenkins, Theodore P. Sweeten, Francis W. Kreais and Craig L. Parkinson were charged by the SEC with orchestrating an offering fraud involving the sale of interests in a purported mining company. $504,436.26 in promissory notes were sold to investors as financing for Jenkins’ mining company, Arco Hills Silica Company. Too good to be true: You know what they say. Investors were guaranteed a return on their investment ranging from 53% to 120% within 30 to 90 days of purchasing their notes. $422,536.58 of it went to pay for the three’s daily expenses, entertainment, house payments, legal expenses and medical bills. $25,394.68 went to old investors. Investors relied on a false and misleading geologist report by a Craig Parkinson. Supposedly the mining company had mining claims that contained 460 million ounces of gold that would be worth $805 billion. Supposedly Parkinson knew about the solicitation. Jenkins disgorged $82,757.06, plus prejudgment interest of $12,616.73 and paid a civil penalty of $82,757.06. Sweeten disgorged $227,702.32, plus prejudgment interest of $23,238.73 and paid a civil penalty of $227,702.32. Kreais disgorged $112,077.20, plus prejudgment interest of $12,662.75, and paid a civil penalty of $112,077.20. Parkinson disgorged $10,000, plus prejudgment interest of $1,354.21, and paid a civil penalty of $40,000. I’m betting the earlier investors had their payout clawed back. Dante’s Heat Index: 6 for bringing in a crooked geologist.

BOK fraud

A BOK Financial Corporation subsidiary Bank trust department sold fraudulent bond offerings managed by Christopher F. Brogdon, an Atlanta-based businessman. Brogdon was charged with fraud and ordered by the court to repay $85 million to investors. The Bank knew that Brogdon was withdrawing money from reserve funds for the bond offerings and failing to replenish them, and he had failed to file annual financial statements for the offerings. BOKF and Neilson also knew that the nursing home facilities serving as collateral for one of the bond offerings had been closed for years. But a Bank officer allegedly warned others that disclosing these and other problems could impair future business and fees from Brogdon, upset bondholders, and cause regulatory issues for bond underwriters. Therefore, they decided not to inform bondholders as required. Failing in their role as gatekeeper and fiduciary BOKF paid $984,200.73 of the fees the bank collected from its work with Brogdon plus interest totaling $83,520.63 and a penalty of $600,000. Dante’s Heat Index: 5 for lousy due diligence.

Tycoon Energy

Tycoon Energy, Inc. president, Matthew Dee Nerbonne, is charged with orchestrating an oil and gas fraud. He raised money from investors based on false projections, made the investors pay for well drillings, including one never drilled, and none of the investments became commercially viable. Nerbonne did pocket about $1.5 million of the investor’s money, which he used to pay for his personal expenses. Dante’s Heat index: 5 for a bad name

Wells Fargo

What can you say about Wells Fargo? Why had thousands of Wells Fargo employees fraudulently opened credit and deposit accounts in customers’ names, without the knowledge of those customers?

CEO John Stumpf is to blame.

A Wells Bank goal was to have each customer have 8 accounts or products with the Bank, regardless of whether they needed them or not. Stumps was skewered by the Senate investigation committee last week. Stumps said that “the vast majority of our people did it the right way.” Kudos to New Jersey Senator, Robert Menendez who swung Stumpf with “You and your senior executives created an environment in which this culture of deception and deceit thrived.” Do you get it now, Mr Stumpf? Reminding Stumpf of his testimony that the average Wells Fargo banker earns “good money”, between $30,000 and $60,000 a year, the senator asked what Mr Stumpf made in 2015. “$19.5 million.” “Now, that’s good money,” Menendez replied. Senator Elizabeth Warren, normally quiet and not outspoken at all butchered Stumpf with, “This isn’t the work of 5,300 bad apples. This is the work of sowing seeds that rotted the entire orchard…You squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions in your own pocket…You should resign. You should give back the money that you took while this scam was going on and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission,” she said. This Monday the State of Illinois said was ceasing doing business with Wells Fargo, which California did last week. Stumpf last week resigned his position as advisory council member for the Federal Reserve Bank of San Francisco. According to Wells, Stumpf will forfeit $41 million in unvested stock. In the meantime Wells Fargo is facing putative class action from shareholders filed Monday in California federal court that alleges the bank duped its investors and violated federal securities laws by misrepresenting its cross-selling activities that resulted in millions of unauthorized accounts opened up in customers’ names. Wells Fargo stock has dropped 14% since the debacle broke and there are persistent rumors that Warren Buffett spoke to Directors, but so far Buffett has denied that. He did say that he hasn’t ever committed to any of his positions however. It is said that if Stumpf did step down, according to his termination deal, he would receive $134.1 million. That’s about $21,000 for each employee fired for participating. Dante’s Heat Index 10 for hitting Mom and Pop small saver.

Another Wells.

This one a Ponzi scheme William J. Wells, a former Promitor Capital LLC investment adviser got 46- months in prison and must pay up $555,000 for a six-year scheme. He had lied to family and friends, using their investments to make payments to earlier investors. He also used their money to fund his own expenses. He is also expected to make restitution in the neighborhood of $1 million. Wells said alcoholism was to blame. He started in 2006 lying to friends and soliciting money for a private fund. The fund, it turned out was for his own trading losses, personal expenses, credit card bills, car payments and private preschool tuition, and then payments to unhappy investors. Nothing new or even creative, Dante’s Heat Index 4

Once a Crook

“I am not a crook” Richard Nixon

By John Lohr

Bernie Madoff didn’t invent it, Gordon Gecko didn’t perfect the “Greed is good” philosophy, and the regulators won’t end it. Scams, fraud and fat cat greed have been with us for millennia. It’s the way we’ve done business.

The South Sea Bubble

In 1711, the English government was wallowing in debt, so an enterprising group of merchants (read: crooks) calling themselves the South Sea Trading Company bought a load of the debt, and started hawking its shares on the market. Within months, the stock had soared from £100 to £1000, with no end in sight. The British government gave them exclusive trading rights to some ports Spain was allegedly willing to part with in Chile and Peru. They imagined piles of gold and sold their shares as the economic opportunity of a lifetime. But, according to historians, “The Earl of Oxford declared that Spain would permit two ships, in addition to the annual ship, to carry out merchandise during the first year… [but] the first voyage of the annual ship was not made till the year 1717 and in the following year the trade was suppressed by the fight with Spain.” Unfortunately, nobody was listening, instead followed a rumor that trading was unlimited. Investors went giddy, the Company made boatloads of cash from them, and imitators came and went quickly, along with the investor’s money. Stock priced soared and the higher they went, the more the investors fought to get in (kind of like Madoff, now that I think about it). The Company insisted profits were just around the corner, just like those liars at Enron. The “bubble burst, as all bubbles do when nobody wanted to buy stocks anymore and those that had them, couldn’t sell them. According to historians, the now wealthy directors of the South-Sea Company, told investors what great things the Company had done for England. Then they bolted with the money. (Sounds like, well, name a merchant bank) We even had our own taste of corruption, greed and scandal here in Wyoming:

The Teapot Dome Scandal

When President Warren Harding gave Senator Albert B. Fall, his Secretary of the Interior control of the Teapot Dome, Wyoming oil fields in 1921, Fall promptly leased the Teapot Dome to his pal Harry Sinclair’s Mammoth Oil Company In return Fall received about $400,000 from the oil barons. He tried to keep it secret but his newfound wealth caught attention. A committee of the U. S. Senate committee uncovered the crooked dealings and went public in 1924. Fall was the subject of criminal trials, hearings and so on, until finally he was found guilty of bribery in 1929, fined $100,000 and sentenced to one year in prison. Harry Sinclair, who refused to cooperate with the government investigators, was charged with contempt and received a short sentence for tampering with the jury. Overall the Teapot Dome scandal came to represent the corruption of American politics which has become more prevalent over the decades since the scandal. Nothing like what we have today, though.


And then there was Carlo Pieto Giovanni Guglielmo Trebado (“Charles”) Ponzi who developed the criminal enterprise that today bears his name. The scheme was simple in its essentials. 1) find investors. 2) find more investors. 3) Use the money from the second group of investors to pay off the first group. 4) Profit. 5) Repeat until indicted. This is what is now known as a Ponzi scheme. Starting with a loan of $200 and promising a 50% return for investors within 90 days, he sold 5000 times more International Reply Coupons (mail receipts) than were ever issued and pocketed more than a million dollars a day until the house of cards collapsed when he was 38. Today he looks like an amateur; Bernie didn’t even get caught until he was over 70. More to come from Dante’s Corner©.

[From Somebody Else’s Money© 2010, John and Ian Lohr, Isle Press. Edition 2 Release date October 31, 2016] John Lohr can be reached at


by John Lohr

I write for and contribute comments for a high profile investment website which has 7 million investor subscribers. We have been having a pointed discussion among the contributors and investors as to the value of financial advisors. Some don’t think advisors add no value to the
performance, net of fee. Performance is a big talking point, even though some contributors have tried to point out that there are hand-holding and other psychic services advisors provide.

Some investors are just lost. Some are playing the adult version of gaming. Whatever the reason, there is a high percentage who just do not want to deal with an advisor.

Now, we can argue whether we should or ever could attempt to convert these investors to an advisor model. I personally think it is folly to try to do so. Some people just want to do what they do, and that’s OK. Some advisors think an advisor’s value is in preventing the client from blowing themselves up, but do they really? Some advisors think the advisor value lies in preventing a client from bailing out at the wrong time. But, I will contend, that’s wrong. What these advisors fail to realize is that investors have a real reason for making decisions as weighty as bailing out. It is the basis of psychological behaviorism. Fear, Comfort, Sleep at night, remembering a past event that had perhaps drastic consequences, Volatility nightmares. Did you ever consider that maybe your client is not psychologically equipped to watch their portfolio or their stock go up one day and down the next. Ask Oprah. So, while you’re trying to motivate that investor to “stay the course” you may be making a mess out of his or her mentality. It may sound radical, but its Ok for the client to make a mistake. Another error in judgement some advisors make is believing so strongly in their investment strategy and philosophy, that they believe it is the only “right” way. A black box, monte carlo simulations, liability management, free cash flow analysis, technical momentum plays.

Some advisors can’t understand why ALL investors don’t see the world the way they do. Well, investors have preferences: maybe one likes “name stocks: (Disney, Coca Cola, Apple). You can see, touch feel them and read about what they’re doing (Cedar Fair just opened a new roller coaster—biggest on 3 continents.) They like the “touch and feel”. Some investors favor sectors: techies like techs; healthcare professionals like healthcare or biotech; soldiers like defense stocks; financial professionals like good stories, and on it goes.

Which brings me to the point. Investors have something to say. Listen to them. Don’t try to sell them your “best” method, because it won’t be for many of them. The ones who will like your “best” method will be those who don’t really care about investments. They see investments as a

Gil Weinreich, senior editor of Seeking Alpha says Financial Planning may be the single most important component of the investment process. Teresa Schafer says every Financial Advisor should be required to take the CFP exam. Pause there a second. The exam goes deeply into
tax and estate planning, retirement planning, real estate and a host of other things that Advisors should know to help their client create an investment plan. Len Reinhart says today’s investor spends more time in planning a vacation that planning their financial life. Media advice on
investing is terrible. Reinhart says today’s technology and tools can enable an Advisor to engage in “Aspirational Investing.” It’s all about goals, objectives, lifestyle choices and being able to do what the investor really wants to do.

Listen to your investors. Here’s what some of them have actually said:
“If financial regulators were more sophisticated and less afraid of offending powerful political lobbyists (and future employers), the regulators would recognize that the act of charging clients
a percentage of AUM is a breach of fiduciary ethics.” “When you are left with your entire retirement savings on your lap, buying a few books on
Amazon doesn’t really do it. The market was crashing, our holdings were dropping rapidly and we had no one to help us. Should we have bought some books or taken a few courses during that period….?…maybe, but we didn’t. We were facing our savings going down the tubes. We didn’t know where to turn.” “We met with this very nice woman and let her manage it. We signed a contract with her that it would be invested in very conservative investments. 60% bonds.

Long and short, a year later, the market started going down and down. We couldn’t reach her as the market crashed. I called, called. I was told she was away and no one else could access the account. Well, we eventually threatened UNNAMED FIRM with a lawsuit if we couldn’t access our account. This advisor never appeared again. We finally were able to access our account after 5 months of threats. We lost almost 60% of our IRA. We also found that the portfolio was invested in a ‘high risk’ portfolio. Mostly stocks, many companies do not exist today.” “I asked a number of retired people, friends and family if they were happy with their investments. They all said they were, they got their payments each month. When I asked if they knew what they were invested in, the resounding answer was ‘no, I have no idea.’”

“To clarify, I did not post here to find an advisor. I am trying to educate myself to possibly handle things myself.” “I guess ‘buyer beware’ but I didn’t know that back then. I wouldn’t even know that my current
broker was not working for our best interest. We trusted him very much. We had no involvement in our portfolio. That was the mistake, but I wonder how many other people have no idea what they are invested in.”
“Sometimes life takes quick, unexpected turns where one does not have the time nor ability to stay on top of the portfolio. You trust who you hired and trust he/she is looking out for you.” “If it’s true that long term market returns are relatively predictable and that there is no value
added by active management, it makes no sense to give RIAs a rising income that’s turbocharged by the (passive) compounding of inflation and market returns.” “This is a new world to me. There is so much I do not understand, but I’m working on it.”

Advisor or Investor: How would you respond?

Hey Bootleg Frankie

By John Lohr

We have been researching Securities frauds since 1986 beginning with Securities Fraud in the Digital Economy followed by our flagship, since 2010. Looking at my latest list of frauds from the SEC (see website), I got thinking about email securities fraud.

Most of our readers and subscribers know the oldies but goodies: The Pump and Dump, Pyramids and the “,mistaken” phone call or text from “Breathless” Mahoney:

“Hi Jim (You’re not Jim), My Friend Salamander just gave me some news about his company Pills R Us. They haven’t announced it yet, but they’re getting an approval from the FDA on a proven cancer curing drug. I don’t know about you, but I’m calling my broker now to load up…”

It seems theres a new take on these weekly. In fact the guy who invented the Nigerian email scam ( somebody had to be the first) just won the Ignoble Prize.

Well, how many of you have received emails like this one? (YOU’LL FIND MY PERSONAL LIST OF AD MONGERS TO AVOID BELOW)

“Hello BOOTLEG FRANKIE (THAT’S YOU) FROM MICHAEL Re: Your $1486.68 Affiliate Payment

This is a notification to let you know that once your start using this system, affiliate commissions will be released to you weekly… GET IT NOW !! This Makes $1486.68 OVERNIGHT (Proven). To your success, – Mikey Big Profits Code Founder P.S. There are only 3 spots available in your area. Download it now before its too late.”

The thing about emails like this is that they are RELENTLESS. They hound you daily: “Your payments are on hold until you complete your account setup. FINISH THAT REGISTRATION NOW !!!!” “You can’t get paid until you activate your account.”

“YOU’RE NOT LISTENING !!!! This is your 3rd and LAST CHANCE to download.” “All access will be removed in the next 12 hours. After this point you will no longer qualify. You’re losing your commissions if you miss this.” “You got Unclaimed $1842.81 Cash Profits” “TRADE FOR FREE enables the average guy to make money from other peoples developments without having to know a single thing about coding or trading.” I could go on and on, but the point is there are thousands of these scams: “Free Profits;” “Proven method;” “This one really works”; it’s all garbage. In fact if you get an unsolicited investing email from someone or something that has hype like this in it: “Proven ! Guaranteed ! Collect now ! You were selected… Actual results… Testimonials. They call you by name (or Bootleg). Fancy tech sounding companies. Saying, “Make money like Facebook” (or wherever). Make money overnight ! All you need is a PC (Apple users are out, I guess). From anyone called “Professor,” “Doctor,” “Pastor” that you don’t know personally. If the email address does not match the name of the company. If they refer to events that didn’t happen (‘In our last conversation, “your current project’…)” DELETE IT.

So, are these come-ons legit? What’s your definition of legit? One thing for sure, they want your money. Are they honest? SERIOUSLY?? NO. Are they ethical? See answer just above. Are they frauds? Probably some. Are they scams? SEE ANSWER ABOVE Do they have money waiting for me? If you have to ask this, I give up. Just for fun, here is a partial list of places I block. Quantom Code. Zero Loss Software. Tradex Confidential. ZLF. MPP. Binary options. Anything with backtested results that are touted in more than one paragraph. Any outfit that emails me more that 3 times a week. In fact, we’re doing research on consumer fraud for our If you have tips or war stories to share, especially on trading systems or investment schemes that are too good be true we’d love to hear it. For more war stories on fraud and other ways to lose the ranch, keep in touch at Until next time, I GUARANTEE you’ll hear from me.

Regards, John

DANTE: TURN UP THE HEAT: Our fraudsters of the week: CAUGHT

The reason we never put out Somebody Else’s Money in the mainstream hard cover book world was that we just couldn’t keep up with the crooks. So here we will give you the weekly investment frauds and their short stories, complete with a Dante’s Heat Index on a scale of 1-10.

Ever Work at Morgan Stanley and Have their Company 401k? A lawsuit filed Friday accuses Morgan Stanley and its board of mismanaging the firm’s 401(k) retirement plan and costing 60,000 employees hundreds of millions of dollars. The complaint was filed by a former employee and seeks to cover other workers. It alleges that the company picked inappropriate and high priced investments so that the bank would profit at the expense of its staffers. Dante’s Heat Index  6

The SEC Charges FRAUD Against a Hedge Fund Manager who Allegedly Scammed the Terminally ill. The SEC says the Manager and his firm paid terminally ill individuals to use their names on purportedly joint brokerage accounts so he could purchase investments on behalf of his hedge fund and redeem them early by invoking a survivor’s option. Donald Lathen of New York City Hedge Fund, Eden Arc Capital allegedly used contacts at nursing homes and hospices to identify patients with less than six months to live. He successfully recruited at least 60 of them by paying them $10,000 apiece to use their names on accounts. When a patient died, Lathen allegedly redeemed investments in the accounts by falsely representing to issuers that he and the terminally ill individuals were joint owners of the accounts. Lathen’s hedge fund was the true owner of the survivor’s option investments. Issuers paid out more than $100 million in early redemptions as a result of the alleged misrepresentations and omissions by Lathen and Eden Arc Capital. Andrew M. Calamari, Director of the SEC’s New York Regional Office said “Lathen allegedly put hedge fund client assets at risk by keeping them in accounts in his and the terminally ill individuals’ names rather than properly placing the hedge fund’s cash and securities in an account under the fund’s name or in an account containing only clients’ funds and securities, under the investment adviser’s name as agent or trustee for the client.” So, let’s see, that money belonged most likely to beneficiaries, siblings, kids… SO Latham allegedly stole somebody else’s money. Dante’s Heat Index 20 (yes, out of 10)

Goldman Sachs Head Trader Barred from the Industry Simply by Misleading Customers into Paying Higher Prices. NO!… Edwin Chin, the former head trader in residential mortgage-backed securities (RMBS) at Goldman Sachs generated extra revenue for Goldman by concealing the prices at which the firm had bought various RMBS, then re-selling them at higher prices to the buying customer with Goldman keeping the difference (and he increased his own compensation while doing it). Chin also misled purchasers by suggesting he was actively negotiating a transaction between customers when he was merely selling RMBS out of Goldman’s inventory. Chin’s gone from the business, thankfully, and is $400,000 lighter. Dante’s Heat Index 9

Whistle blower Sidestep Caught. Health Net, Inc., a California-based health insurance provider has agreed to pay a $340,000 penalty for illegally using severance agreements requiring outgoing employees to waive their ability to obtain monetary awards from the SEC’s whistle blower program. What did they have to hide? Probably nothing, right? They agreed to an SEC cease and desist order and promised to try to get in touch with all the former employees to let them know that whistle blowing is a protected right. Sure, no monetary penalties. Dante’s Heat Index 4

SEC Charges Stockbroker and Friend with an Insider Trading Scheme to Profit in Advance of Two Major Announcements out of a Pharmaceutical Company. Paul T. Rampoldi and two other brokers at his firm were apparently tipped by a then-IT executive at Ardea Biosciences ahead of the company’s announcement of an agreement to license a cancer drug and later tipped him in advance of its acquisition by AstraZeneca PLC. They made approximately $90,000 in illicit profits by trading ahead of those announcements based on nonpublic information that flowed to them through one of the fellow brokers who learned it from the other after he was tipped by the IT executive. They would subsequently divide the profits among them. The SEC seeks permanent injunctions as well as disgorgement, interest, and penalties. Dante’s Heat Index 5

Defendant in SEC Insider Trading Action Found Guilty by Federal Jury in a Related Criminal Case. On August 17, 2016, a jury in federal court convicted Sean Stewart of insider trading and related charges. He is presently scheduled to be sentenced on February 17, 2017. In a scheme spanning at least four years, Stewart illegally tipped his father, Robert K. Stewart, about future mergers and acquisitions involving clients of two investment banks where Sean Stewart worked. The complaint alleges that his father, a certified public accountant, cashed in on the tips by placing and directing highly profitable securities trades ahead of the public announcement of these corporate transactions, generating approximately $1.1 million in illicit proceeds. Guilty, Guilty, Guilty and there’s an SEC action still pending. Dante’s Heat Index 7

Court Enters Final Judgment Against Boston-Area Defendant in Insider Trading Case. Patrick O’Neill, of Belmont, Massachusetts, was found guilty of engaging in insider trading in the stock of Wainwright Bank & Trust Company (“Wainwright”). O’Neill, a former senior vice president at Eastern Bank Corporation, apparently learned through his job responsibilities that his employer was planning to acquire Wainwright, and he then tipped Watertown, Massachusetts real-estate developer Robert H. Bray (“Bray”), his friend and fellow golfer with whom he socialized at a local country club. As a result, Bray purchased 31,000 shares of Wainwright stock. After the public announcement of the acquisition caused Wainwright’s stock price to increase nearly 100 percent, Bray ultimately sold all of his shares for nearly $300,000 in illicit profits. O’Neill pled guilty to a criminal charge of conspiracy to commit securities fraud and he was sentenced to one year of probation and a $5,000 fine. Bray went to trial and a jury returned a guilty verdict on one count of securities fraud for insider trading. Bray was thereafter sentenced to two years in prison, ordered to forfeit the proceeds of his illegal trading, and ordered to pay a criminal fine of $1 million. O’Neill and Bray were both criminally charged by the United States Attorney in Massachusetts for the same conduct. Bray’s SEC case continues. Dante’s Heat Index 8


Investor Psychology


Are financial advisors making a mistake in trying to steer investors away from making what seems to be a bad idea.  Take for instance the client who calls you today and wants out of the market entirely because they’re not comfortable.  Generally, we would point out the wisdom of staying invested, historical returns, unpredictability of market timing and a bunch of conventional wisdom we’re gained over the years.  After,  your collective wisdom is a big reason why they hired you, right?  But, are we missing something?

In a recent discussion with a large number of significant investors, something rather startling was pointed out to me.  It comes from the cognitive behavioral school of consulting, and represents a large portion of the poor perception of Advisors by the significant investors.

Humans are very rational when it comes to investing.  But rational is a qualifier that is certainly different from one human to the next.  The lead investor in the discussion maintained that “All behavior is purposeful. Sometimes what is irrational to an advisor is very rational when viewed through the eyes of the one doing the behavior. Perhaps the trick is to first understand how the behavior is rational for the person doing it, and then to intervene in a manner they find “rational”.  This, he said is where Advisors miss the boat.

Many Advisors try to get clients to see things as they do rather than to simply provide useful information they can use, or not use, on their journey.  The former is adversarial, the latter collaborative.

It seems a number of behavioral scientists have written about this adversary vs collaborator, such as Gary Applegate, Happiness is Your Choice, and  Sherry Cormier, Paula Nurius, and Cynthia Osborn. Interviewing and Change Strategies for Helpers.

 We tend to focus on the client’s financial needs, but clients have psychological needs as well, which may be much more important to them.  If we are to take a client-centered approach, shouldn’t we be looking at the client’s world through their eyes?

We ask clients for referrals, but what does a referral mean if the referring person does not know the needs, mind, psychology and objectives of the referee?

The lead investor in this discussion said, “Both clients and advisors arrive at the first meeting with a set of expectations for the roles they and the other person will be fulfilling. Perhaps the advisor’s job (after hearing why the client is there) is to facilitate the client expressing their expectations, to share the advisors expectations, to provide a realistic picture of process/outcomes, and to work with the client to resolve any differences in role expectations or relationship demands. Thus, the advisor is working to form a working alliance with the client to meet the needs of the client rather than working on “selling” the client on the advisor’s investing philosophy.”  Agreement prevailed.

The result of this discussion was that investor consensus said a truly superior financial advisor can see the world through the eyes of the client without judging the client. By working from this shared worldview the advisor will be more effective.

Like each of us, our clients have a reason for everything they do.  Shouldn’t we take the time to really get to know them, their likes and dislikes, and what makes them tick.  Like us, investors believe they are doing the things that are best for them.  Just because we’ve been in this business more than a few years, why do we have the right to judge our client’s actions or decisions without first actually understanding them?

Comments welcome.  More on this next time.    John