Many banks now operate as a one-stop shop for all your financial needs. The convenience factor is seductive. How well does this “all-things, to all-people” boilerplate approach work? This is a tale of a community bank, acquired several times, and now part of a publicly traded one-stop financial supermarket.

The Facts

Kelly went into the bank where she and her husband (and her father) had done their business and personal banking for over 40 years. The teller noticed their savings account had over $225,000 and suggested that she discuss how to get a better return with one of the bank’s investment brokers.

Kelly met with the broker and was clear from the beginning that this money needed to remain safe. They had lost of lot of money in the market during the dot.com era, and her husband had health issues that kept him from being at full earning capacity. The broker assured her the money would be safe and they’d get a better return. She compared a CD side by side with a high-yield, municipal bond UIT. The CD’s paid 1%-1.5%; the municipal bond UIT paid 5% tax-free. The broker assured them there was no extra risk to get this 5%. The broker also gave her a handwritten note stating: “no fees to you.”

Bottom Line

This fund lost 30% in 6 months; not very like a CD. Fees of 4% were taken out of the account in months 4, 5, and 6. Kelly called me to get a second opinion. The branch manager wasn’t able or willing to help, so we arranged a meeting with corporate compliance to review the sales process. This was no longer a relationship-based, community bank.

What We Found Out

In the selling process, the broker never asked Kelly about the mix of their other investments held away from the bank; never mentioned the risk of rising interest rates; never mentioned the risk of portfolio defaults (the underlying credits in the bond fund were a mix of investment and high yield bonds); and never mentioned the risk that the fund used leverage which can magnify returns or losses.

Neither did this broker take heed of Kelly’s insistence that the money needed to be kept safe. She manufactured a suitability form that said Kelly had a moderate risk tolerance, was above average in investment knowledge, and that she received a prospectus. None of these things were true. Unfortunately, Kelly signed the suitability form in their office and went home to discuss the investment with her husband.

Never Sign What You Don’t Read and Understand!

Kelly’s error in judgment was that she signed something she didn’t understand. She assented to questions she hadn’t been asked and confirmed receiving a document that she never received. She trusted their life story to a firm they had done business with for 40 years. Kelly showed her husband the handwritten side by side comparison and relayed the conversation. They decided to invest $225,000 in the Municipal Bond UIT.

In the 4th month after investment interest rates started to rise. The fund lost about 5%. After the 5th month it was down about 10%. The city of Detroit’s bankruptcy was also causing panic in the municipal bond market. Kelly called the broker told who her it was a short-term issue and that it would come back. In the 6th month, the fund was down over 20%. Kelly called the broker several times and noted this was not like a CD. The broker took a more combative, smug tone. Kelly called me to get a second opinion. I had her bring me all their statements, so we could review and piece together reality. By the time we got together the fund was down 30%.

Motive: Follow the Money

Despite the hand-written “no fee to you”, the account statement showed in months 4, 5, and 6 fees were taken from the investment principal that added up to a 6% commission. The “advice” motive was now obvious; and the broker’s lie about fees was a fraud. The CD that had been shown for comparison wouldn’t have paid the broker very well, though that would have better met Kelly’s need for safety. The basis for the recommendation was either the commission or broker ignorance or both. Neither one serves client interests.

The Truth is Less Believable than Fiction

We called the branch manager who had no authority. Then I called the chief compliance officer located in another state, outlined the case, and set up the meeting. Kelly went into their office and I phoned in from out of state.  After the initial pleasantries, and the corporate BS assurance line that “we take these matters very seriously. We want to hear the story so we can get this matter resolved for you.” I began by telling him that due to the deception in the selling process, we wanted to be made whole on the loss.

As the call proceeded, I somehow got disconnected. Bad coincidence? As I found out later, the bank’s two compliance persons tried to make Kelly feel guilty by telling her the “broker has a clean record, and this won’t look good for her.” By the time I could get re-connected they were wrapping up, and they said they would get back to us within 10 days. When the letter arrived, the bank said they would do nothing.

Kelly had immediately begun calling attorneys. And Voila! She found an attorney who promised to take the case on contingency. The attorney assured her there was little risk of losing, no cost to her if they lost, and everything to gain. She was ready to sign. I told her to wait and I called this attorney to inquire further. As it turned out, the lawyer neglected to mention to Kelly that they would need to bring in a couple specialists to do forensic work. Fees of $10,000-$15,000 were required to get started. They would have been spending good money for bad.

I made a couple calls to reputable attorneys.  They agreed the chance of winning was good. However, given the claim amount involved they couldn’t take the engagement in good faith because their fees would consume all or most of the claim.  The attorney explained to me that banks, insurance companies, and brokers look at settlements of less than $50,000 as their “fraud free” zone because when people find out the legal cost, they realize a “win” only means more money lost.

Let the Bad Guys Walk?

Fortunately, one doesn’t need a lawyer to file an arbitration case with FINRA. However, it’s a process that’s outside of my normal activity. Still, I was so incensed by the sliminess and deception that I was prepared to do it. When I perused FINRA’s website for the forms and the instructions on how to file arbitration, I found a link to consumer awareness tips along with a list of resources to help consumers who believed they have been cheated. In this list was a university legal department that offered its services to consumers who believed they had been cheated.

I discussed the case with the professor and former securities attorney who supervises the law students. He outlined the process and what to expect. I supplied them with all the facts and history they needed. As we later discovered they had won a prior case with the same Municipal Bond UIT!  They put together an impressive presentation of the facts and submitted it to FINRA for arbitration. Within three weeks, the bank said they would be willing to bypass arbitration and mediate at 85% of what we had asked for.

What Change Did We Make?

This type of financial supermarket is a good business model for the banks: no-cost, captive lead generation by leveraging existing banking relationships. Many a bank customer has fallen prey to very similar sales tactics. A conflicted product sale that was called “advice.” I think you would agree it’s a lousy service and economic model for the client. Kelly decided to move their accounts to another bank. The bank never called or inquired why they were leaving after a 40 year working relationship.

We gave Kelly and her husband objective advice, kept them from making a second costly emotional mistake, and we found a remedy for the abuse. Kelly and her husband learned a lesson and we got most of their money back. And corporate greed was forced to pay for its sin. That’s work that made a difference.

Jerry Matecun helps business owners and individuals discover key planning and investment considerations vital to build and protect the value of your assets. For a no-cost, confidential conversation regarding your unique circumstances call or email Jerry at 949-273-4200, 616-499-2000, or jerry@compoundvalue.com.

PLEASE NOTE: This article is based on a real life situation. All names and specific circumstances have been altered to protect confidentiality. Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. For details please see Disclosure.