Bogleheads on Investing- Episode 036 transcript

Lisa Bragança, JD, MBA, is a former Branch Chief in the Division of Enforcement of the Chicago Office of the Securities & Exchange Commission. She handled investigations of accounting fraud, Ponzi schemes, insider trading, churning, and unsuitable investments. Today, Lisa is now in private practice at Bragança Law.

Throughout her career, Lisa has been an advocate for the rights of people with physical, cognitive, and psychiatric disabilities. She previously served as counsel in three statewide class actions seeking to compel the State of Illinois to comply with the Americans with Disabilities Act. She also regularly speaks about elder financial exploitation, securities regulation, recovering investment losses, and cryptocurrency.

Episode 036- guest Lisa Bragança

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Rick Ferri, July 24, 2021

Rick Ferri: Welcome to Bogleheads on Investing episode number 36.  Today our special guest is Lisa Bragança. For years Lisa worked as a Securities and Exchange Commission enforcement branch chief where she led investigations into security fraud, insider trading, market manipulation, and other illegal activity.

Hi everyone my name is Rick Ferri, and I’m the host of Bogleheads on Investing.  This episode, as with all episodes, is brought to you by the John C Bogle Center for Financial Literacy, a 501(c)3 non-profit organization. You can find us Boglecenter.net and your tax deductible contributions are greatly appreciated. Today our special guest is Lisa Bragança. For years Lisa worked as an SEC enforcement branch chief where she led investigations into securities fraud, insider trading, market manipulation, and other illegal practices. Now she aggressively fights for the rights of investors as an attorney and litigator with a particular emphasis on elder abuse by financial advisors. So with no further ado I’m very happy to have as my guest today Lisa Bragança.  Welcome to the show Lisa.

Lisa Bragança: Thank you. It’s very nice to be here Rick.

Rick Ferri: Well we’ve got a lot to go over today. There’s so much information that you’ve written about and so much that you have done in the industry to try to protect investors and particularly seniors. But before we get to all that, I’d like to spend a few minutes if you could– tell us a little bit about yourself and how did you get to this point.

Lisa Bragança: I started off in college as an economics major and I thought economics had all the answers. I went to University of Chicago and discovered that it just did not make sense. Economics was a model but it didn’t fit the way people actually behaved. But that was back in the ‘80s, before this whole area of behavioral decision making came up, so when I went to the economics department and said, “Hey I want to study how people actually make decisions.” They said, “You know, you really don’t belong in this department.”

So I went to work. I didn’t go on in economics, I just got my degree and I went to work for Arthur Anderson– this is pre Supreme Court case, pre Enron–and I was a consultant with Arthur Anderson and went to business school night. And at that point, when I was in business school I was introduced to behavioral decision making and that research. And that rang bells for me. That was really interesting information but I kind of chugged along and ultimately decided to go to law school.

And after law school I spent many years litigating and then ultimately found my way to the Securities and Exchange Commission– the SEC– and it was heaven. I was awash in accounting fraud, and you know it’s like getting to peek under the hood of your car, back in the old days when I used to spend time with my dad monkeying around with the engine. I got to see how things worked and it was very cool and looking at the effect of how things were structured, on the incentives. Money drives what people do.

Rick Ferri: So you’re talking about advisors and brokers here. You’re not talking about clients, obviously.

Lisa Bragança: Right. I focused on advisor incentives, but also the incentives of people working in corporations. You know, I’m sure that my business school cost accounting and and financial accounting professors would be very surprised that I really took to this because those weren’t subjects that I shined in in business school, but all of a sudden the economics, the behavioral decision making, the accounting, all came together and I really felt like I was in the right place to be able to protect people and to try to create better systems.

And I have to say I believe after all these years of working in securities fraud, that most people can be drawn into doing something bad if the right circumstances are there. And I hate to say that.

Rick Ferri: So Lisa, that’s interesting you say that because when I was working in the brokerage industry there was a compensation method that as soon as you went in you had to pass your exams and so forth, before you could sell anything, before you could be an advisor. And the firm that I went to, which was Kidder Peabody, initially back in the late 1980s paid me a salary for one year, but then in the second year every month I got less and less money. My salary went to zero, and by the end of the second year I had to be making it 100 percent on commissions. Now I ended up able to do that, but I watched a few of my colleagues do some unethical and in some cases illegal things, just to be able to bring some money home to their family and to make it in the industry. They didn’t start out that way, it’s not what they intended to do, however they did eventually get caught up in some illegal activity.

One person actually created his own mutual fund and had the clients fund his mutual fund, which just went into his bank account, and then he, wow, when he had two million in there, he left for Singapore before they caught up. Another broker was selling some Canadian penny stock and doing a pump and dump scheme. I mean all these things were going on with these new brokers because they needed to feed their families after the first year and they were getting desperate. And desperation — I noticed, I witnessed it; I watched it — causes people to do some things they don’t think they would ordinarily do.

Lisa Bragança: I agree. I have seen that so many times. I saw so many different types of ways that people went astray. And the thing that can pull you back is fear of being caught. So having really good compliance and supervisory provisions in place helps. But also the ethics of the environment that you’re in. And even though I felt like business school was an epiphany for me, I was disappointed to see the lack of ethics teaching and the lack of emphasis on ethics when I was in business school. I’m glad that things have changed and that is much more of a part of the curriculum now to me. And ultimately that’s what led me to shift from business school to law school — was I just felt like the rules are important and we shouldn’t just be trying to get around the rules or get as close to the edge as possible. You know, how do we create a system for enforcing the rules? But I wanted to go beyond that and create incentives for people to comply with the rules.

Rick Ferri: When we’re talking about the people or the advisors we’re really broken down into two different types, right. There are the broker dealers and then the investment advisors. How does the SEC sort of differentiate between these two?

Lisa Bragança: Well broker dealers, or we generally refer to them as brokers, are historically just salesmen. That was in the old days. You just called your broker or your broker called you and it was just like a car salesman, so the broker just had to have a reasonable basis for believing that a recommended stock or strategy or mutual fund was appropriate or suitable for a customer. Whereas an investment advisor is somebody who’s a fiduciary. That’s somebody who provides advice and it has to be in the best interest of the customer. The investment advisor puts the interests of the customer ahead of his own.

Rick Ferri: But do they? I mean, seriously, I mean you have examined a lot of investment advisors who are fiduciaries. And I was an investment advisor for– I was a broker for 10 years and then I was an investment advisor for 17 years. And yes there were situations like I described where the brokers didn’t put their clients best interests first, but I’ve seen a lot of situations where the only investment advisors who were fiduciaries also didn’t put their own clients best interests first. You know, as far as what to do with money. Should you pay off your house? Should you roll this 401k back into another 401k or put it in an IRA? You know the AUM or assets under management incentive for the investment advisor, who wants to get more and more and more AUM under management.  I’ve seen some advisors give some pretty bad advice.

Lisa Bragança: Oh, I absolutely agree. This is the legal structure that exists, but that doesn’t mean that everybody complies with the law and rules that they should–are required to comply with. And so that’s why the examination process that the SEC has for investment advisors is so important. And it’s good that the SEC is getting more resources to be able to do more regular exams of investment advisors so that those investment advisors know that the SEC is going to show up regularly and will be, I hope, more likely to comply with the rules.

Rick Ferri: Could you explain, if you will, what responsibility FINRA [Financial Industry Regulatory Authority] has? Who is FINRA and what responsibility do they have to protect investors, which is different from the Security Exchange Commission? So how do the two work together?

Lisa Bragança: FINRA is in a self-regulatory organization and that’s sort of a weird hybrid, it’s government and private. FINRA operates under the supervision of the Securities and Exchange Commission but it is a private organization that is run by the industry, by brokerage firms, and that’s  to my mind the fox guarding the henhouse.

FINRA has two main parts to its process. One is its enforcement and regulatory arm where it creates the rules for the brokerage industry and it has to get the SEC’s approval for those rules, but it creates the rules. And on the other side it runs an arbitration forum for disputes between brokerage participants, brokerage industry participants, but also for customers. Almost every customer has to go through that process if that person has a dispute with a brokerage firm.

Rick Ferri: Yeah so that’s very different from the government agency, the Securities and Exchange Commission that has primary responsibility for regulating and supervising investment advisors. So FINRA, if you’re a broker, FINRA is going to come and do compliance examinations of your business and FINRA enforcement is possibly going to call you to investigate you. Whereas if you’re an investment advisor you’re not gonna, and not also a broker, you’re not gonna hear from FINRA. You will hear from the SEC or other securities industry regulators. The SEC obviously  has authority to bring action against investment advisors, but does FINRA outside of arbitration have any authority?

Lisa Bragança: FINRA does have authority to bring regulatory actions. The first thing that FINRA  does is files a charge against let’s say a financial advisor and there’s a hearing process that takes place where the FINRA enforcement attorneys present evidence and that financial advisor presents contrary evidence and a hearing officer makes a determination that then can be appealed to one level at FINRA and then on to the Securities and Exchange Commission and into the courts then. So it is a robust process and FINRA enforcement does conduct a significant number of investigations. I will say personally that in my dealings on the customer side with FINRA enforcement I think too often they accept sort of facile simplistic explanations from the brokerage industry about why something happens, so I don’t trust them nearly as much as I do other securities regulators.

Rick Ferri: That’s not a surprise. They’re run by the brokerage industry and just to clarify, you’re no longer working for the SEC. You have your own private practice.

Lisa Bragança: That’s right, I  have my own firm. I have not been at the  SEC for many years.

Rick Ferri: Okay, so if somebody had a complaint either against a broker who works for Wells Fargo or Merrill Lynch or whomever brokerage firm- we used to call them wirehouses– I don’t know if that term is used anymore- or somebody had a complaint against an investment advisor who is registered either with the state that they’re in, depending on how much money they have under management or the Securities and Exchange Commission. Do they have to go to different entities to file a complaint, or is it all done in the same place?

Lisa Bragança: You have pointed out exactly the major complaint that I have with this industry, with regulation in this industry. It’s too confusing. You do have to go to different places and it’s ridiculous that a customer should have to figure out when they’re dealing with an investment professional. Am I supposed to call an insurance regulator because I might have invested in indexed annuities? Or am I supposed to call the SEC because it’s an investment advisor? Or am I supposed to call FINRA because this is a broker? And what about if it’s somebody who’s dual licensed, which a lot of financial advisors, a lot of investment advice providers are dual registrants. So it makes a big difference because the robustness of an investigation that you are going to get if you call FINRA versus calling the SEC versus calling a state regulator; it makes a difference.

So in many ways I think customers have to consult with a lawyer before they even know where to go and that doesn’t make sense. This is just a goofy system. It’s way too complicated. But not surprisingly that works to the advantage of the industry. People don’t make complaints or they make complaints in the wrong way and they may end up hurting their own case if they end up ultimately bringing an arbitration to be able to recover their losses. Then another thing to know is that when you bring a complaint to a regulator that regulator doesn’t represent you. FINRA doesn’t represent you when they’re bringing actions. The SEC does not represent you. The customer state regulators do not. Their interest is in the system, in preserving the integrity of the industry.

And while they do want to make sure that customers are protected, if you want to make sure that you are recovering your losses you really do have to have your own lawyer. Sometimes the SEC does get money back to customers and sometimes FINRA does, and sometimes state regulators do, but not always, and not even most of the time. So it’s important to know that before you go to a regulator.

Rick Ferri: So unless you know what the jurisdiction is, or who is responsible, and you know how to fill out the paperwork, and you know how to go, where to go, to file a complaint against an advisor, insurance agent, or whomever you feel that you’ve gotten some bad advice from. If you don’t know any of this and you have to hire legal counsel and that’s not cheap, and so there are people then who maybe have had small losses but to them they’re huge losses, right. I mean if you only have two hundred thousand dollars to your name and you’re retiring with two hundred thousand and someone put you in a really inappropriate investment and you lost half your wealth. At what point,does it make financial sense for somebody to go and seek out an attorney versus trying to navigate the system themselves?

Lisa Bragança:That’s a great question and that’s part of the reason, like another reason, that I think the system is so very broken, because losses to people with small accounts, small you know, lower net worth are much more damaging and yet it is much harder to get legal representation for those types of claims. So one of the things I handle, a lot of phone calls from people who just are looking for representation for a particularly small amount, and I will refer them to either regulators to be able to try to help them. And sometimes those are folks who can get help from regulators.

But another place I refer them to is securities or investment clinics, that are at certain law schools. That doesn’t cover everyone, but there are some. There are clinics in Nevada, in New York, in Georgia, in Florida and they can represent people outside their states. but they are looking for smaller cases that they can use as a teaching mechanism for law students, and that could be a great way to be able to get representation for a small case.

Rick Ferri: Let’s go into problems that all investors face if they’re going to decide that it’s too complex so they’re going to hire an investment advisor, and if they go down that path of hiring an investment advisor what are some of the problems that all investors face?

Lisa Bragança: Well all investors face the issue of being influenced by their advisor. So you know your financial advisor is somebody who has a whole lot of information that you don’t have, just like when you’re talking to your doctor about surgery, or you’re talking to your lawyer about how to put together your your estate plan, we have a real asymmetry here, an unequal relationship in terms of information. So how do we deal with that?  Well I know when I go in and see my doctor, I tend not to quiz the doctor about all the different options for a certain surgery, let’s say, so we tend to have a relationship of trust. But that only works when you have a real fiduciary relationship. So that’s one issue, is that there’s a lot of trust and you have to disclose a lot of personal details, so that again creates a relationship of trust.

You then have complexity so you have a whole world of options out there for investing and you’re really looking to your investment advisor or your financial advisor to narrow that down for you. You want the advisor to be talking to you, thinking about you, and then giving you some more limited options. You don’t want to be looking at 99,000 options. You want to look at five or three, and so the choice of those is very important and that is in the power of the advisor. And those could include indexed funds, you know, just straight out total market index fund or an S&P 500 index fund.

But those aren’t the kinds of funds that generate a whole lot of fees for the advisor so there’s a real tension there. You know the advisor is obviously entitled to make a living wage and make an income. I mean I don’t expect people to work for me for free but there’s a tension there and some of the research is very interesting in in terms of disclosure of financial interests so people who hear from let’s say their advisor, “Oh well, I’m going to get a commission for this sale,” they will take that into account in their brains but they won’t take it into account enough because they generally aren’t told the actual dollar amount that the advisor will get so they’ll discount the advice in their heads, some amount, but not the full amount. So sometimes even knowing that there is a conflict of interest, or a different financial incentive for your advisor might not be enough, might make things kind of worse.

Rick Ferri: It’s interesting because I have this debate on twitter all the time with financial advisors who are fiduciaries who are charging what I consider high fees and there’s this big debate that goes on. Everybody who knows me knows that I’m really against financial advisors who are charging one percent because when you break it down to a dollar amount it’s actually a lot more money to charge a client one percent per year every single year on their portfolio than it is to go out and buy say American Funds and pay a commission one time and then the fees after that are relatively low. Brokers do have the opportunities to not gouge clients using commissions if they do it correctly, and a lot of times I hear the fee-only financial advisors who are fiduciary saying “Well you know commissions are bad. Don’t pay commissions… incentives, incentives.

And yet I look at how much money the one percent AUM advisor is taking in from their clients and I look at the broker who put a client’s 401k rollover into an IRA, a million dollars into American Funds let’s say — and I’m not touting American Funds, I’m just using it as an example — pay no commission and then the fund fees are maybe 0.6 or 60 basis points a year on American Funds. And yet  that’s the whole total cost of the million dollars in an assortment of American Funds, and yet it’s the one percent advisor who is not only putting you in mutual funds so you have to pay fees to the mutual funds but on top of that charging you an extra one percent, ten thousand dollars a year. I find it ironic.

Lisa Bragança:  Right, and that’s something that the SEC will be looking into, and there’s actually a term for it: reverse churning. How is it that we can have people who could be very well served by commission services then rolled into these one percent per year plans, programs that end up costing them much more. So that’s something that financial advisors have to consider and many of whom are dually licensed so they could go either way they could set up an account where they would be charging regular fees for assets under management or they could set up a separate account under the same roof, that’s a brokerage account. But there are very different duties that go with both of those accounts.

And just to step back again to this is such a confusing industry, I think many people who I’ve talked to have multiple accounts with the same financial advisor at one of the big wirehouses. You know it could be a Merrill Lynch, a Wells Fargo, Ameriprise, anyone and they believe that their broker owes them a fiduciary duty on all those accounts. And you get into litigation with the broker and you find oh no, no, no, this particular account is a fiduciary account but these other three accounts are not. And it’s just mind-boggling. They might collect them all together into a single consolidated report that that’s what the broker discusses with the customer every year, but oh no, no, there are very different legal standards that apply. So we can, we’re fiduciary, but only to this small area. And that’s just not reasonable. That’s not something that customers understand. It’s wildly abused.

Rick Ferri: Let me ask a question about these things called “happiness calls” or “happiness letters.” Basically let me describe what I believe they are. The firms have a compliance department and they’re looking and reviewing the account and they’re seeing some, maybe some irregularities or some issues in there, so they send a letter and they say, “Are you happy with what we’re doing? Are you satisfied?”  So tell me about happiness letters.

Lisa Bragança: Oh these are the most insidious things that firms use to undermine customer claims, potential claims against them. So that’s exactly what happens. I mean there is something that pops up for compliance as a red flag. It can oftentimes  be it’s over concentration in particular types of investments, or it’s investing in high-fee investments, or switching which triggers fees, and so that will be a red flag. It will pop up on someone’s compliance report and instead of the compliance people coming down on the financial advisor and saying, “Why are you doing this? and undo it, this is wrong.” What happens is the compliance person will either call or send a letter to the investor and say “Hey you know what, we just want to check with you on your account and see if everything’s doing okay. Do you have any complaints? Is there anything that you’re not satisfied with?” And the investor very often has no idea why this has happened and they may not even talk about the particular transaction that has prompted this call. But they record the call, or they send the letter, and they say if they send a letter they say if there’s any problem contact us. And then for three years later whenever, when I get the case, I see this and the brokerage firm says, “Hey you know what, we reached out and there were no complaints. Look at this.”

Rick Ferri: “Everything is good. Here you go.” It’s terrible.

Lisa Bragança: Oh just awful.

Rick Ferri: Let’s get into particular issues for senior investors. Elder abuse by financial advisors. In the financial industry, in the aggregate, what are some special issues facing seniors?

Lisa Bragança: Well, the first thing is that seniors are sitting on their nest egg. They have saved for their whole careers. They’ve done what they were supposed to do. And now I have these savings that they are going to be living off of. And that is just a juicy, delicious-looking target for bad guys just like Willie Sutton used to say, you know why did he rob banks; well that’s where the money was. So they just are targets. And there’s nothing you can do about that, it just is, and many of them grew up when people were a little more polite than they are today, a little more trusting. And they might end up not wanting to cross-examine their financial advisor on something.

I think another thing that is very important for seniors is that most of us, and I’ll put myself in that category, I’m 58 years old, none of us want to recognize a decline in our cognitive abilities. We like the view of the older person, 87 years old and running marathons and competing with Watson to play chess. We love that idea, but we all are subject to some kinds of changes in our cognitive abilities as we grow older and it makes sense to plan for that and to be somewhat accepting of it. And it doesn’t fit the way that most of us want to view ourselves in retirement. We want to be robo warriors out there able to do everything.

Another thing that I think many seniors face is there’s a fierce desire to be independent and want to maintain privacy and independence over all of their financial doings. And I can use my mother as an example, a perfect example. I am in this business. I know about all of the ways that things can go wrong, so of course I talk with my family. In particular I talk with my mother about this and she will have no part of it.

Rick Ferri: So even though you are you, she will have no part of it.

Lisa Bragança: Exactly, she listens. I’ve gone so far as to take all of my estate planning documents, and just give her drafts of all of them so she can look at it. And she’ll look, but she still likes doing the free dinners that somebody at Morgan Stanley offers, and she likes to manage all of her own investments. And I don’t I have any knowledge whatsoever of where her accounts are. These are tough issues when the thing to do, in my mind, is to set up checks and balances early. But lots of people don’t want to do that because that is a concession to aging and so in some ways I feel like people should do it in their 40s or 30s before this is even an issue. So that then by the time they become more fearful of it but you know it’s already done.

Rick Ferri: I happen to live in an over 55 community and we are just bombarded with free chicken dinners all the time and I went to one. I’ll tell you the story.

Lisa Bragança: You must not have been very welcome.

Rick Ferri: Well, I did not say one word okay. I didn’t say one word, I just sat there and took notes, and I actually wrote a Forbes article about it. And the name of the article was You May Never See Your Grandchildren Again, right. This financial advisor, who is a dual-listed advisor by the way, was both a broker and an insurance agent and a money manager. Charged AUM.

Anyway the room is full of people who are 65 or so. I’m 63, my wife is there, she’s a couple of years younger than me, and we all get a free dinner and we’re sitting there listening. He starts the whole thing out by saying, “Let me tell you a story about a woman who came into my office in 2008, and she had lost almost everything, because her financial advisor had her 70 percent in stock and we all know what happened in 2007 and 2008 when the stock market went down 60,  70 percent. She lost half of her money and she was crying and she says I’m never going to see my grandchildren again, I can’t afford to anymore because they live in a different state.”

And then he went on to talk about how he took this remaining money and not only did he get all the money back but he also added more on top of that and gave her a guaranteed income and now she’s happy. She calls him all the time because she can see her grandchildren all the time. And so then he came to the audience and he said, “If you want to see your grandchildren again you need to talk to me.”

Honest to god that’s how the whole thing started. I couldn’t believe it and he just kept on this story time and again, how if the woman in the room, he was very sexist about it, if assuming the man was the one who was doing the money which it might– my occupation, I know that’s not true it’s probably 50/ 50, right. Whether the woman does the money in the house or the man– but in this particular case he was very sexist about it and said if your husband dies you had better come to see me or you’re never going to see your grandchildren again. And honest to god this is what the guy says.

And I wrote a Forbes article about it and I got a lot of feedback from that because there happened to be a couple of people who had been to that seminar and actually read the article and said they went for the second interview with them and he tried to sell him some insurance product and then he tried to take that insurance product and put it into a one and a half percent AUM fee. I mean it was just fees on top of fees on top of fees on type of fees. But it was all legal. I mean it was legal, right. I mean there was nothing illegal about it. I call it a soft fraud, and this is rampant in the over 55 community I live in. Every week we get bombarded with “come to a free meal at this great restaurant” and people go and they give these people their money. And it’s just terrible but it happens and they’re just a feeding frenzy.

Lisa Bragança: Right, and one of the things that they are feeding on is that first, people love free. Free is like the touchstone for everything, like oh my god, free. And free to me my reaction to free is always to recoil but the other thing is once you’re given something the way our brains are wired we have this automatic thing that kicks in that’s like a ledger. We have a little financial ledger in our brain and when we get something.

Rick Ferri: We keep score, we have to keep score.

Lisa Bragança: Yes. Then we owe something. So when you mentioned that some of these people went to this meeting, well most people feel some level of obligation once they’ve gotten the free meal, then to sit down and have this meeting and they might feel once they’re in that meeting the obligation might go further for them then to give some amount of money to this person to invest.

And the research on this is really compelling.  I mean it’s down to researchers have gotten this kind of obligation to kick in by somebody getting a Coca-Cola that they didn’t even request. That’s why you get free stickers in the mail, or you’ll get free stamps in the mail, because it creates that obligation regardless of whether you think that it will. It’s an automatic thing because we’ve evolved this way.

Rick Ferri: You’ve seen it all. You’ve seen the worst of it I’m sure. What kind of warning signs should people be looking for, particularly seniors?

Lisa Bragança: Well before we look at it talk about warning signs, the first thing I would want to really make sure people know is that this can happen to anyone. And I think one of the biggest problems with financial abuse of folks who are older is an embarrassment, a sense of “Oh my god I should have caught this, and it’s my fault for not catching it.” And so before I point out what possible red flags there may be or warning signs, I want to make sure that you’re not blaming yourself. Because there is a gigantic multi-billion dollar industry out there that is designed to overcome your resistance. Once you learn these things please understand that there’s all kinds of effort to get you to ignore them anyway.

And educating yourself about investments is not always the answer. You know I’m a big fan of investment education but you should beware thinking that you know more than you do. One of the books that’s come out recently that I’m a huge fan of is How I Invest My Money: Finance Experts Reveal How They Save, and it’s by Josh Brown and Brian Portnoy, and Christine Benz participated in it, and a number of people. But it’s about how these sophisticated investment professionals invest their own money, and I feel like I’m a fairly sophisticated investment, not professional, but certainly knowledgeable about the industry and I’m an index fund investor. I have very boring investments.

I think that’s important to know that just because you see a TD Ameritrade ad that says, ”Oh Joe down the street is investing in options. You should be investing in options too.” Just because you learn about options doesn’t mean you should be investing in options.

Rick Ferri: How do you protect yourself from all of this?

Lisa Bragança: Some important things you can do to protect yourself include don’t sign anything saying that you read a document if you didn’t. Everybody I have has signed something that says they read a prospectus, not just that they received it but that they read it and they understood it and they recognized all of these risks and nobody reads these things so don’t be signing those things. I mean if I could do one thing in the world to protect investors I would have convinced everybody, all customers to stop signing those things. If you are being asked to sign something like that you are probably investing in something complex, something that’s not traded, something that’s a more complicated investment product than you need.

So if you take a look at that small print and it says in there that you read something and you understand it, take it home and read it and make sure you understand it before you sign.

Rick Ferri: Yeah that’s difficult. I mean I can tell you from years in the industry that yes, people don’t read things.  I have to send out my ADV Part 2 because I have my website with all the disclosures on there. I have all this information and I’m just doing an hourly model and I have to have all these disclosures. But I know when somebody reads everything, and you know why I know? Because I’ll get an email that said on page 37 of your ADV at the bottom you have a typo. You put the word “it’s”– it apostrophe s–and you shouldn’t have the apostrophe there. Okay, I know that they’ve read it. And I send them back an email saying, “Well, thank you for that, I appreciate it” and I fix it. But the point is that very few people read all of this, and I agree that they should, especially if you read the arbitration clause which can be extremely complicated to read. But it’s very important I found out to understand what your rights are if you end up going into arbitration.

Lisa Bragança: And a way to avoid having to read things, I mean SEC commissioners have testified before Congress and said I don’t read the prospectus for my investments. So they recognize nobody reads it and I will freely admit I don’t read the prospectus for most of my investments and I don’t read the 10ks. I don’t have time. I’m busy reading the 10ks and the prospectuses for my clients’ investments, but I invest in fairly vanilla type public investments. So that is a protection that I have. I do not invest in non-traded REITs or oil and gas limited partnerships or anything that’s not publicly traded. And that’s what those SEC commissioners are saying too. Like yes, they’re not reading everything but they are investing in public products and so they’re kind of relying on the market to take care of them. So that’s my focus when I’m talking about those kinds of subscription agreements. I  don’t have to sign a subscription agreement to invest in an index fund, I just buy it. I get a prospectus or I can go online and look at the prospectus but I just buy it.

But if I’m going to invest in a non-traded REIT I have to sign some fancy paperwork and I have to make a whole bunch of statements there saying that I’ve received things and that I’ve read things and that I meet certain criteria. And the vast majority of people who sign those things don’t pay any attention, they just sign. The advisor fills it out for them.

Rick Ferri: So read everything, at least reasonable, unless you’re going to buy something generic like a total stock market index fund or something like that. But if you’re going to buy anything exotic make sure you understand it all. I got to put insurance into this, like annuities.

Lisa Bragança:  Who has ever read an insurance policy other than me?

Rick Ferri: The actuary who wrote it, maybe.

Lisa Bragança: The lawyer, actuaries who write it, and me, and these are the only– and the lawyers who represent the issuer or the broker, eventually– but yes they’re ridiculously complicated. I have to hire an expert to figure out what the heck does this annuity really mean. It’s ridiculous, so yeah, for that reason alone I would tell people never invest in an annuity, any form of annuity, because I don’t know of a broker who sold one that can explain it.

But another thing that I see often is customers who sign forms that are blank. That happens way, way too often and it’s absolutely verboten. It should never, never, never be happening but it continues to happen. And people trust their broker when the broker says, “Oh I’m just going to fill this in later. Don’t worry about it.” So they sign. And then your reaction to it Rick is exactly what I think the way people should react to it and yet they don’t.

Rick Ferri: A lot of people find out about financial advisors through some organization that they might belong to, might be the church, in a religious organization, or some specific… especially a church because we had this happen in my family where my in-laws were taken to the cleaners by an insurance agent who they met via the church. Who the church endorsed this insurance agent, believe it or not, then ended up taking my in-laws to the cleaners. We got their money back through the Texas Insurance Bureau by filing against them. But affinity fraud, I think is what it’s called, correct?

Lisa Bragança: Exactly – affinity fraud. It’s a very powerful area because we– again this is preying on how our brains work– we need to trust to some degree as human beings. One example when you are driving down the street do you evaluate every single car coming in the opposite direction to ensure that that car is staying on the right? No, we trust that people driving with us will keep to the right and we’ll stop at stop lights because if we didn’t trust them then we wouldn’t be able to be out driving. And we are always looking for ways that we can rely upon the people around us to help us to make decisions.

Before I hire somebody to replace windows in my house I check with the guy at my office who I know replaced windows in his house last year and I  go with his guy because I don’t want to put in all the time to do all the research to figure out who to hire. That’s what affinity fraudsters are counting on. They are counting on the fact that there will be a bunch of people who all belong to a church or a temple or some organization and they will be looking for those kinds of shortcuts and there’s nothing wrong in theory with the shortcut except that you can really, really go wrong and if my windows go wrong that’s one thing; if my entire nest egg is stolen that’s a whole different issue.

So you need to be extra careful and that includes, by the way, family members. There are family members who may start up as investment advisors and you should be as careful with them as you would be with somebody with whom you had no connection.

Rick Ferri: I’ve seen that happen.

Lisa Bragança: Yeah, and one way to do that is to set up a system to say “Well I’m just going to do this. This is my process.” And then when you’re asking that professional who’s part of your church when you’re starting to work with that person you ask for all of this documentation and you say, “Oh, this is just something I keep for all my investments.” So I have to have this. At least then you will have more than what most people have, which is nothing.They start investing with somebody who’s at their church and they don’t check account statements, or they don’t look at the substance of the investment. They don’t do any due diligence at all, and they lose everything and it’s really tragic.

Rick Ferri: Let me ask a question for people who have older parents. My mother is 90. My father passed away a few years ago. She’s very sharp still but how would I know or anybody know the signs of financial exploitation? In other words how do I pick up by going over to her apartment and talking with you looking around this and that, how do I start to pick up clues that things are not right?

Lisa Bragança: Well one thing to look at is just how well is your family member taking care of other things in their lives. Are they keeping up with maintenance on the house or just are there lots of financial statements or other envelopes that aren’t opened. That’s something to be concerned about, if there are just piles of mail. And what kinds of things is your mother or your family member talking about. Are you hearing about a particular friend who’s becoming very influential, and maybe ask questions about that.

I think an important thing that family members should do, and this can be so tough, is talking to older family members about what their plans are. And I know it sounds like you’re a vulture, you know swooping in, but I had many years of difficulty in getting my husband to finally do an estate plan. We are a dual lawyer family but we had issues about who would have the kids if something happened.  We didn’t agree on it and so we just did nothing, which was absolute idiocy. But once we did it the importance of it was not as much what’s going to happen to our money after we die but what guidance and assistance are we giving to our children for our older years should something happen to us. If we have strokes; if we are in a car accident and lose our cognitive abilities. Or they’re significantly impaired. We have a manual now for our children so they know what to do and that’s a gift we are giving to them.

And so that’s I think a conversation to have with parents to say, “Look, I don’t care what you do with your money. After you’re dead you can give it to whoever you want, but please give me guidance, give your children guidance about what you want done during your life. We would like that.”  And there are lots of resources for that but one of the most important and the way that I went about finally convincing my husband to do this is working with a NAELA attorney– it’s n-a-e-l-a –it’s the National Association of Elder Law Attorneys, and they have a high ethical standard and I have worked with many in that group, and that’s where I would start.

There are situations where people, older folks, have a full estate plan that has been done but they’re very private and they don’t provide those documents to their family members. And in particular if you have a living trust and you have successor trustees should you become disabled you really should let those successor trustees know and give them a copy of the  document. I had a very tragic case. A woman who was older, had no children herself, had never been married but had a loving family, extended family, and she lived some distance from her family though. And she developed dementia and other physical problems. She had been befriended by her financial advisor’s family. This was kind of a family business, you know, the financial advisor.

So when she developed dementia she signed a power of attorney to the wife of the financial advisor. And the wife and family took over her life and blocked her family, prevented her family from coming in and having contact with her and threatened the family when they said that they were thinking about establishing guardianship and it was terrible.

But the thing that the family did not know for another eight years until this person died was that a number of them were the successor trustees and this financial advisor knew that because the financial advisor had a copy of the trust documents, because accounts were in the name of the trust, so this person had done what she needed to do but her desperate desire for independence and privacy undercut the entire plan.

And one other thing that I think is very useful. I received a call about a week ago from somebody who was just talking about setting up new accounts and just was asking for advice as an older investor. And the biggest thing that I think everyone should have is checks and balances. If you are an older person who doesn’t have family or friends that you feel comfortable having knowledge of your finances. Or maybe you just don’t have family. Set up a system with an accountant or a lawyer or a service to receive your bank statements and your investment accounts and make sure that you’ve got at least two who are not connected, and then those people or entities can be just kind of keeping an eye out are you paying your mortgage, are you keeping up with the electric bill and and other bills and are you suddenly investing in some crazy ass things or are you kind of chugging along the way you should be.

Rick Ferri: Final question. That this is a real topic of discussion at the SEC and FINRA, elder abuse. And there have been some new rules and some new laws that have been enacted. Can you briefly talk about some of the new rules and laws?

Lisa Bragança: Some of the most important things that from the industry side and that the SEC is dealing with is how do we balance, what do we do as an industry when there are signs of financial exploitation of someone who’s older. There are privacy provisions in the securities laws so brokerage firms can’t just go out and call a family member or report these issues because there are laws in place that protect the privacy of our financial accounts. So the SEC and Congress addressed some of this in a number of different ways.

One way is that you can now designate somebody, and you should be asked on all of your accounts to designate a trusted contact person and that is somebody who you consent to your brokerage firm or your investment advisory firm contacting in case anything fishy happens. If you start calling, for example, and like a great aunt of mine did, and start transferring money to the Nigerian prince because you’re getting calls from this nice person over and over again, the firm then could call this trusted contact about it and say, ”Hey, we just want to let you know that this is happening.” 

Rick Ferri: Interesting.

Lisa Bragança: You know, that didn’t happen with my great aunt and unfortunately a lot of money went to the Nigerian prince before we had any idea that this was happening.

Rick Ferri: Now this is a FINRA amendment.

Lisa Bragança: That is right. So it is just for brokerage firms that that would apply. So that’s an important factor. There are other things that are being looked into in terms of permitting brokerage firms to be able to put holds on accounts. We are struggling here with the rights of older investors who may develop disabilities. They have a right to make bad decisions, to be able to maintain their autonomy and do things maybe that somebody else might question. But this is a really tough situation to be in and it’s tough for anybody. It’s tough for lawyers to be struggling with somebody who is showing signs of having cognitive impairments.

The Americans With Disabilities Act protects people with disabilities and folks have the right to as much autonomy as they can handle and they can’t be discriminated against because of that disability. On the flip side we have trillions of dollars in the hands of older folks who’ve saved it up their whole lives and it’s a tempting target for fraudsters.

Rick Ferri: So let me just sum things up here a little bit. The way to prevent this is to prevent it before going in. In other words prevent it from happening as opposed to trying to unwind it after it happens. Because after it happens it can be number one devastating to seniors, and number two it could take years to unwind it. That’s even if you have an attorney. So the idea is prevention.

Lisa Bragança: Absolutely. That’s why I do what I do. It is very tough to have to talk to lots and lots and lots of people who call and I can’t help them and that breaks my heart. And so that’s why I go to Washington and that’s why I talk with you and that’s why I publish things, because I want that to happen less.

Rick Ferri: Well Lisa it’s been a really wonderful conversation. Thank you so much for giving us your time today. Best of luck with your campaign to try to protect investors.

Lisa Bragança: Thank you so much Rick. It’s been great talking with you.

Rick Ferri: This concludes this episode of Bogleheads on Investing.  Join us each month as we have a new guest.  In the meantime visit bogleheads.org, boglecenter.net, the Bogleheads wiki, get involved in your local Bogleheads chapter or a virtual community, and tell others about it. Thanks for listening.

Investment adviser, analyst, author and industry consultant

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