How I helped my clients recover $27 million dollars

Two times in my career as an investment advisor and financial planner, I helped clients lose millions of dollars of wealth due to the way I was traditionally trained by my industry.

Investment Storytellers

It is a proven statistic (Dalbar Reports) that 86% of money managers do not beat the S&P 500 index. Which means that most money managers are simply telling stories to their clients in hopes that their clients will hop on board, stay the course, and trust their so-called expert advice. I know this because I was once one of these storytellers who managed $150M of individual stocks.

The First Big Loss

From 1994–1999, things were on the up and up as we celebrated the Technology Sector rise within our investment platforms. In 2000, the market took a turn for the worse, and over the next three years, we watched as our clients’ portfolios dropped 9% in 2000, about 12% in 2001 and over 22% in 2002. This historical timeframe was called the “Tech Wreck” and was especially devastating to our clients who were in their late working years or early retirement. They experienced what our industry calls the Sequence of Returns Risk which occurs when someone is retiring and expecting to live on a reasonable income stream, but is unable to do so due to extreme market drops so close to retirement, or during retirement.

Harry didn’t like me anymore

One of my near and dear clients, who we will call Harry, had grown his IRA from $200K in 1992 to over $1M by the time he was 65 and ready to retire. He retired in the early part of the 2000 and we chose a distribution rate of 10% per year, which we felt was conservative after experiencing double digit returns for 4 years straight. Three short years later, when Harry was 68, his $1M portfolio had lost two-thirds of its value due to market downturn and he only had about $350K left. At this late stage in his life, there was no way for Harry to make up this loss. Even worse, there were Harry’s all around the world experiencing the same thing. I remember sitting next to him at our kids’ 2002 High School Graduation, and he said to me, “Jeff, I don’t like you very much anymore.” I replied, “Harry, I don’t like myself very much either.”

Losing money for my clients is a horrible feeling

I knew there had to be a better way for me as an investment advisor to help my clients keep and grow their money without this type of risk and I was determined to find it. If the traditional advice of “buy and hold” didn’t work, perhaps an alternative approach was necessary.

The Second Big Loss

As I shared in the previous article, in 2005, one of our Estate Planning Tax Attorneys that we worked with, told me that he and his firm had found a money manager who did not experience the same type of drop with their clients’ funds during the Tech Wreck. The process they used promised to protect clients’ principal, while still providing good growth. This gave me hope and after doing what I felt was the proper due diligence, we started off by placing a small portion of our client’s portfolios into this money managers’ Hedge Fund managed by Thompson Consulting, Inc. (TCI).

Our initial investment was in April of 2005 and after six months of seeing the promised results, we added more of our client’s portfolios into the TCI’s Hedge Fund.

By August of 2007, we had placed over $38M of our client’s portfolios into this hedge fund

Just a few weeks later, in the latter part of August of 2007, we received a fax stating that this Hedge Fund — which had promised to protect our client’s principal — had lost 95% of our clients’ money.

I went to bat for my clients

Over the ensuing 3 months, and after incurring over $250K of legal fees attempting to chase the TCI Principals in an attempt to recover our client’s investment funds, we discovered they had no money, no insurance, no income and essentially no assets. At this point in time, the sharpest attorneys asked the question: “Who is still standing next to very deep pockets, that we could sue?”

It just so happened that I was the closest arbitration candidate they could find. If the sharp lawyers could connect me to my former Broker Dealer, Associated Securities Corporation, perhaps their parent company, Pacific Life — a multi-billion-dollar entity — could write a check to replace my clients’ lost funds. I agreed to do whatever I could to help.

For the next two years, I learned first-hand what it feels like to go through depositions, arbitrations, and lawsuits. It is not an experience that I would wish upon my worst enemy.

And as uncomfortable as that experience was, instead of responding to questions with “I don’t recall” or “I don’t remember” or “I have no idea” I gave the prosecuting attorneys two pieces of critical evidence that allowed them to prove that my former Broker Dealer was guilty of not exercising the proper supervision of my Registered Investment Advisor. As a result of my cooperation, the prosecution won the arbitration award resulting in the parent company writing a check for over $38 Million which allowed my clients to recover an average of 72% of their principal, or $27 Million.

Never again

By 2008, when my clients’ received their funds back, their total overall financial loss was 28%. Ironically, that year the S&P 500 lost 38%.

Today, as a result of all I learned, I do not support my clients in taking the kinds of risks I once did when I was part of the “traditional financial advisory” brethren.

Instead, I now focus solely on providing financial solutions with innovative Life Insurance companies who can guarantee that our clients cannot lose any of their principal due to market drops.

In the past, this approach would have meant that my clients would have had to sacrifice some of their growth in exchange for this protection, but the industry has evolved and today’s options allow the potential for double-digit growth, without the corresponding risk to their principal.

The reason Life Insurance companies are able to produce these results is because of their continued innovation, along with the overall interest rate environment, which is about double what it was 3 years ago.

Finally, a true win win win win. My clients sleep better at night and so do I.

Redemption

These past 17 years were extremely hard. Like I said, something I wouldn’t wish on my worst enemy. With my reputation constantly in question, and only a slice of the story out there, rebuilding my life and business has been an uphill battle. I felt like an imposter and lived in fear that prospective clients would google me and think I was someone I am not. Many did, and chose not to work with me.

Thankfully, a mentor and friend in the industry urged me to take back the narrative and share the full story in this way. I can now stand tall again and do what I love — help people keep and grow their wealth.

Only this time, without risk of market drops.

This is Article #3 of a three-part series. Here are the other two:

Article #1 — Why the SEC charged me with fraud and the three lessons you can learn from my mistakes
Article #2 — What I learned after losing $38 million of my clients money