They Trusted the Wrong Advisor…

Key Concepts

• Churning: Excessive trading in a client's account by a broker to generate commissions, often without regard for the client's best interests.
• Inverse ETFs/ETNs: Financial instruments designed to profit from a decline in the underlying index or asset; these are highly complex and often unsuitable for long-term retail investors.
• Risk Profile: A measurement of an investor's ability and willingness to lose some or all of their original investment in exchange for greater potential returns.
• FINRA (Financial Industry Regulatory Authority): A government-authorized not-for-profit organization that oversees U.S. broker-dealers.
• Opportunity Cost: The potential gains an investor misses out on when choosing one investment over another.

The Financial Mismanagement Experience

The speakers recount a negative experience with financial advisors hired around 2016 to manage their retirement savings. Despite the advisors presenting themselves as a professional, balanced team, the speakers felt the advisors "oversold" their credentials and brochures.

Performance Discrepancies

While the broader stock market was experiencing growth during the early years of the Trump administration—with peers reporting returns of 8% to 10%—the speakers' portfolio remained stagnant, yielding only 3% to 4%, or occasionally resulting in negative returns. This performance gap prompted the speakers to investigate their account activity, leading them to withdraw their funds in 2019.

Legal Findings and Malpractice

Upon withdrawing their funds, the speakers consulted a FINRA attorney to audit their statements. The investigation uncovered several instances of financial misconduct:

• Churning: Excessive, unnecessary trading within the account.
• Unauthorized Actions: Forged signatures and the unauthorized alteration of the clients' risk profile to justify riskier investments.
• Inappropriate Assets: The inclusion of penny stocks and complex inverse ETFs/ETNs, which were inconsistent with the clients' stated goals.
• Account Inflation: The attorney noted that approximately $300,000 in volume had moved through the account, despite the clients never possessing that amount of capital, further indicating illicit activity.

Financial Impact and Consequences

• Direct Losses: The FINRA attorney estimated the direct financial loss to be between $80,000 and $150,000.
• Opportunity Cost: The speakers emphasized that the true cost is higher when accounting for the lost growth potential of the capital during the period of mismanagement.
• Regulatory Action: The advisor eventually lost his professional license.
• Class Action Context: The speakers were excluded from a separate lawsuit involving 10 other clients of the same firm, which cited a minimum of $2.6 million in collective losses.

Synthesis and Takeaways

The narrative serves as a cautionary tale regarding the importance of due diligence when selecting financial advisors. The speakers highlight that even when an advisor appears professional, investors must remain vigilant regarding their risk profile and account activity. The case underscores the dangers of "churning" and the use of complex, high-risk financial instruments (like inverse ETFs) without the client's informed consent. The primary takeaway is the necessity of regular account monitoring and the immediate engagement of legal counsel when performance significantly deviates from market benchmarks or when unauthorized account activity is suspected.