This tale is especially for my two daughters and those women that will find themselves single at some point in their lives. This is a cautionary tale as well as a young tale and one that must be embraced. The moral of the story is that since women outlive men, marry later today than a generation ago and divorce is a common day occurrence it behooves them to understand money. It is almost a certainty that they will have to deal with it on their own for a substantial portion of their adult lives.
I’m sure that everyone has heard of stories like this, but in early 1989 I ran across this situation. It seems that at age 66, the widow Nancy had been left a little over $400,000 in the form of cash from her husband’s life insurance policy. Before he passed they had owned a house in another state and after a few months she decided to sell it and she relocated to Maryland and bought a townhouse in close proximity to her children and grandchildren. She paid cash for her townhouse and after all expenses she started an investment account with a well-known full service brokerage firm with an initial balance of $450,000. The widow Nancy had no debt of any kind after her move and she was receiving a monthly income from pension and social security of almost $2000/month. Her needs were modest and she lived comfortably on the $2,000 per month. She was wealthy by my definition since she didn’t need any income from her $450,000.
By the time I met her in early 1989, things had changed dramatically. Her portfolio had dropped to under $70,000 and it looked as though it would go to zero at the rate it was hemorrhaging cash on a monthly basis. I spent a few minutes looking over her statements and it was clear what had happened. The widow Nancy was a victim of broker churning.
It seems that the widow Nancy was completely ignorant in the ways of investments and it seems she was also a trusting individual. This can be a lethal combination if you hire the wrong sales driven advisor or SAD as she had. Read A Tale of Incentive to understand why you should avoid these types of advisors. I spent a few hours reconstructing recent history and was astonished to discover that the portfolio was being turned over every 2 weeks over the last 6 months and that the commissions over the last 6 months alone had exceeded $144,000. As I went back and inspected the entire record of almost 2 years I saw that the account had started innocently enough with a diversified portfolio of front end loaded mutual funds and morphed into a full blown 100% stocks on margin portfolio in less than a few months. Any con man that met the widow Nancy would know that she was an easy mark and that’s exactly what happened. She was conned. The combination of her ignorance with her trust led her down this ruinous path.
The story ends well however. I made a recommendation to the widow Nancy to retain an attorney and she was able to recoup her initial investment in the form of a settlement. I transferred what remained of her account under my management and she invested her settlement proceeds with me as well. Unfortunately, the experience forever tainted her thinking and she insisted that the money be invested in a manner that led to substantially lower returns over the rest of her life than what she should have earned if her risk threshold were higher. She got her money back but she missed out on future returns because she had lost faith. When you lose faith it’s very hard to get it back.
I use the story of the widow Nancy to illustrate a point. If you don’t know about money the chances of someone taking advantage of you increases dramatically. Many women in particular once they get married turn a blind eye to the family finances and only bad things can happen. Don’t do it. As a child and until this day, my mother is in charge of all the family finances and accounting. She meets with the CPA, pays all the bills and knows the location of every piece of paper and every statement. My father’s role was to in conjunction with my mother determine where to allocate the money they saved and the money they have. It works. Read A Tale of Teamwork to get a different perspective of what can happen to women when they allow themselves to not participate in family finances.
The churn and burn is a portfolio of doom and has been around since commissions were invented. It’s used on the ignorant and trustful. It is only one of many potential pitfalls for the ignorant. It’s an extreme example but a good one for illustrative purposes. I recently read about another portfolio of doom, which I call the hope and pray, between a mother and her SAD son that was employed by a well-known national firm. Read A Tale of Incentive to understand why you should never grant a SAD the authority to make transactions in your portfolio without first consulting you. The mother sued the firm as well as her son and she won. She had entrusted her son with close to $3 million dollars and he had lost most of it.
What happened? At first it started innocently enough as it always does. The son would buy and sell for his mother thinking that he was doing a good thing. Of course he was fantasizing because he had less than a year of experience in the business and had not developed a way to control his losses. Invariably, he had a big loss and like so many before him, he felt the need to make it up quickly, so he invested in riskier and riskier stocks while taking larger and larger positions, I call this the hope and pray, until his mother’s money was almost all gone.
I could go on but I think everyone gets the message by now. American financial markets are not set up to help the ignorant. We work under a buyer beware system and if you’re not careful you will get burned. If a widow can’t trust a national firm and a mother can’t trust her son that was trained by a national firm then ladies, you better learn about money. The system is not designed to protect you or any investor.