What I learned after losing $38 million of my clients money
One of my clients told me I had The Midas Touch
Implying that everything I touched turned to gold. This happened in the early part of my career during the timeframe of 1982–2000, when the stock market was experiencing huge growth and was riding high.
Looking back, I did not have The Midas Touch, I was simply on an elevator, with my clients, which was going up. This changed radically in 2000 when the equities elevator started free-falling and dropped 50% over the next 3 years. My client’s lost more than half of the wealth they had accumulated in their IRAs, 401K’s, Mutual Funds, and Brokerage Accounts.
I went in search of a better way to grow my client’s wealth without the risk of a devastating, free-falling market.
Did we just find the best money manager?
In 2005, one of our Estate Planning Tax Attorneys shared that he found a fund manager in Utah which did not have the same free-fall experience and in fact, made money from 2000 to 2003. He asked for my assistance in doing the proper due diligence before we placed any of our client’s funds with them.
I went for a personal visit to meet the principals of Thompson Consulting, Inc. (TCI), and in reviewing their history, approach, systems, processes, and solutions, we chose to place a small portion of our largest client’s portfolio under their management.
After six months of tracking the actual performance and outcome, we were comfortable adding additional money to TCI’s Apex Equities Option Fund (a hedge fund).
During the next two years, Apex accounted for about one-third of our managed money and totaled right at $38 million dollars.
Can TCI do well in all economic cycles?
If any one of our Apex clients would have asked me in May of 2007, if TCI was prepared for any sort of radical changes in our economy, I would have answered in one of three ways: 1) Yes… 2) No… or 3) I don’t know. The most dangerous response would have been #3 and is true in life with many situations, decisions, and assessments we make to best protect ourselves. But the truth was, I did not know if this fund could withstand a market crash.
It’s time to pull back the curtain on the TCI investment wizards
Behind the scenes, and outside of our view, in the early part of 2007, TCI started to feel the effects of the overall economy negatively impacting their trading strategy. They abandoned their safe money approach which protected our clients’ principal and started gambling with our clients’ funds.
When things continued to go south, they misappropriated $3M of our investor funds to reimburse a private client of theirs who was not only a Utah State Legislator, but a cousin to one of TCI’s Principals.
In retrospect, we see now that TCI was an early adopter of the impending economic crash and on August 23, 2007, they sent us a fax at 5:36 pm stating that they had lost 95% of our client funds, totaling $38M.
A bit of self-reflection
I am both blessed and cursed with the gift of a positive mental attitude, typically full of hope, optimism, and high energy. Some have shared that my enthusiasm is contagious, and they love my can-do mindset. Because of my deep background in the financial services industry, both academically and practically, coupled with my can-do spirit, when I recommend a specific investment recommendation, most people go with it.
The curse happens when it doesn’t work out — like with the TCI/Apex experience — and I must face my clients, my friends, my peers, and my family and confess that I failed them. Not only did I lose money for them, I lost them as clients.
Additionally, I lost my most valuable asset : my reputation. My confidence was rocked, my world was turned upside down, we lost everything, went bankrupt, and had to start over at the age of 54.
Jeff, you are not alone
Most of us have had, at one time in our life, a challenging event which may or may not be as significant as my experience. One of my key mentors clarified that it is not the events in our life that determines the ultimate outcome, but it is instead our response to that event, which we have control over, and which can help change a failure into an overall positive experience, especially when we appreciate what we have learned by going through that experience.
I learned that:
— Unregulated hedge funds are not for me, nor my clients
— It’s good to trust, but best to verify
— It’s wise to listen to others who have more wisdom/insight than I do
— Optimism, positive mental attitude, and hope are good traits, but they can also be hindrances. At times, it is good to be a “Doubting Thomas”
— If I cannot properly identify 100% of what can go wrong with a specific investment, then I should not recommend it to my clients
— Some people will lie to your face, steal money, conceal material facts and not tell the truth
— No one company, investment guru, or AI platform has been able to crack the code to successfully invest in the equities market without risking your principal in some fashion or another
— News reporters are not always your friends
— As for me and our Sound Associates and Affiliates, our greatest comfort is in working with the most innovative, financially strong, highly rated, heart centered insurance companies who guarantee that your principal is safe, secure, and cannot be harmed from market drops, while still providing reasonable growth opportunities
Even though the TCI/Apex experience has been the greatest failure of my career, it also has been the biggest blessing to have learned so much from it. This in turn allows us, as Holistic Wealth Advisors, to give our existing and soon-to-be clients the greatest amount of peace of mind, guidance, and clarity.
This is Article #2 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 #3 — How I helped my clients recover $27 million dollars
