A Legal Financial Scam

Most of us don’t have enough money for a person like Bernie Madoff to rip us off.  But common investors are being ripped off every day by a far more basic “legal” scam:  Brokers cherry picking good past investments and then implying that the great past performance represents their client’s actual results.

A good Certified Public Accountant just called me today with this true story:

He was in a meeting with a couple of “high net-worth advisers” from a national brokerage firm going over an investment plan for his client’s money.  These advisers only deal with the super rich – not average folks like you and me. Their thick, spiral bound proposal was full of graphs, pictures and fine print and hit the table with a commanding thud.

The advisers suggested a investment mix of 50% municipal bonds and 50% stocks for his client’s money.  So far so good.

The stock plan had a impressive name attached to it like the “Market Stress Alpha Strategy”.  It had an even more impressive track record.  The graph showed a benchmark (just a hypothetical 50% bond and stock index mix) return from 2007 through 2013 of around 40%.  Then another line showed the brokers Market Stress Alpha Strategy returning over 80% in the same time period.

The brokers sat back and smiled.  After all, they were not typical brokers they were “high net-worth advisers” from a reputable Wall Street firm.  They were the best and this proposal proved it – or so they thought.

Here is where my friend politely slammed them:  He asked:  “How many of your client’s actually had this portfolio back in 2007?”  The brokers answered:  “None of them because this strategy did not come out until 2010…but we back tested the data”.

With the benefit of 20/20 hindsight anyone can go back in time and cherry pick the best investments. Don’t be fooled!

I see and hear about this all the time and most people (even really rich and smart people) never ask that basic question:  “How many of your client’s actually had this exact portfolio way back when and can I speak to any of them?”

Technically the broker did nothing wrong.  He never said any of his client’s were actually invested in this strategy (it’s your fault if you thought it was implied) and if you read the fine print buried in that massive spiral-bound proposal, you would find that it says the opposite:  “These returns are hypothetical and past performance is not a good indicator of future returns.”

Bernie Madoff may have fooled a few rich people but this legal financial scam hurts far more investors day after day.

Don’t be one of them!