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U.S. Agency Wants Brokers Held To Higher Standards

By Becky Yerak, Chicago Tribune (TNS)

CHICAGO — In September 2008, as the financial crisis emerged, a retirement account of Al and Karin Betz slumped in value to $130,000 from about $160,000.

“I got a cold call saying, ‘Would you have some money to invest?'” Al Betz, 66, recalled. “I said, ‘If you can do better, I’ll give it a try.'”

The suburban Chicago couple said they were told that their principal would be protected and that they’d get high returns thanks to a “unique system.”

After the account dwindled to about $3,000, the Betzes filed a claim against the brokerage, accusing it of putting their money in unsuitable investments, such as penny stocks, which can be risky, and making excessive trades.

“When they were selling or buying, they got a certain fee,” Karin Betz, 64, said. “They got richer when we got poorer.”

A lawyer representing National Securities said the firm did nothing wrong.

The Betzes’ situation is illustrative of confusion in the marketplace over the responsibility of brokers handling retirement accounts — something the U.S. Department of Labor is trying to remedy.

The agency, at the behest of President Barack Obama, wants a more demanding “fiduciary” standard required of brokers who make investment recommendations, meaning they would have to act in the client’s best interest. Currently, brokers need only consider whether investments are “suitable,” taking into consideration such factors as customers’ ages, income and appetite for risk.

At an AARP meeting in February, Obama said some advisers “receive backdoor payments or hidden fees for steering people into retirement investments that have high fees and low returns.” Such practices, he said, strip about $17 billion a year from peoples’ retirement savings.

“The challenge we’ve got right now: There are no uniform rules of the road that require retirement advisers to act in the best interests of their clients,” Obama said.

A 30-page report from the White House Council of Economic Advisers titled “Effects of Conflicted Advice on Retirement Savings,” also released in February, said people receiving conflicted advice reduce what would be a 6 percent return to a 5 percent return.

“Such savers hold about $1.7 trillion of IRA assets,” the council said. “Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.” Even a more conservative estimate — say, a half of a percentage point — would reflect losses of more than $8 billion a year, the council said.

Just last month, Securities and Exchange Commission Chair Mary Jo White told a U.S. House financial services committee that broker-dealers should be subject to the same fiduciary standard as registered investment advisers when dealing with retail investors.

Breach of fiduciary duty is the single most common cause of action alleged in arbitration cases, according to statistics from the Financial Industry Regulatory Authority, an independent, nonprofit body authorized by Congress to protect U.S. investors by ensuring the securities industry operates fairly.

“To the extent that fiduciary duties are imposed on all brokers, there’s a very good chance that might put me out of business,” said Andrew Stoltmann, a Chicago securities lawyer representing the Betzes.

In 2014, for example, 3,822 arbitration cases were filed with the Financial Industry Regulatory Authority. Of those, 2,106 alleged breach of fiduciary duty.

The Betzes, who were born and raised in Germany, came to the United States in 1980 for Al Betz’s job. An engineer by training, he worked for a global environmental technologies company for 32 years, first in Detroit and then in suburban Chicago.

Al Betz retired from the company more than 10 years ago. At that point he and his wife started Northwestern Sunrooms, which designs and builds sunrooms, and Betz Design, which makes clothing and window treatments. They became U.S. citizens in 2010.

The businesses are doing “OK,” Al Betz said.

Al Betz said the couple trusted the brokerage, including their advice to buy more shares when they were in a steep decline. “I was not about to try to second guess them,” he said.

As their accounts dwindled to about $65,000, the couple said they showed up at the brokerage’s downtown office and reiterated that they needed the money for their retirement, “which we thought to be just a couple of years away,” Al Betz said.

When the value dwindled to $3,000, he ordered the brokers to never again sell at a loss. Last year, the couple filed a claim against the brokerage with the Financial Industry Regulatory Authority.

“The ‘superior investment method,’ which in reality was nothing more than excessively trading the claimants’ accounts, wiped out virtually their entire portfolio at a time when the equity markets made significant gains,” their claim said. The couple’s investments also were heavily weighted into “small capitalization” stocks and the portfolio wasn’t diversified.

“Diversification is one of the most important strategies to decrease risk in a portfolio, which was completely necessary for customers like Mr. and Mrs. Betz, who were nearing retirement and couldn’t afford to lose these funds,” their claim with FINRA says. “The importance of diversification across different asset classes and within asset classes to decrease risk is a well-established investment principal.”

Al Betz said he trusted the brokers and didn’t consider checking them out. “I didn’t know how to go about doing that,” he said.

Relatively few investors check out their brokers, Stoltmann said. “You can do it online, but most people aren’t aware of that,” he said. “People think brokers, like doctors, CPAs and lawyers, have a duty to act in their clients’ best interest, but there’s a real disconnect between what people get and what they think they’re getting.” Most people don’t second-guess their doctors, accountants, lawyers or brokers, he said.

The home page of includes a feature called BrokerCheck in which the public can type in names of firms or individuals to see if they’ve been the subject of complaints.

The Committee for the Fiduciary Standard, which was formed in June 2009 by a group of investment professionals and fiduciary watchdogs, on its website has an oath that investors can ask advisers and brokers to sign, vowing that they’re acting as a fiduciary. Investors should ask their brokers to sign it, Stoltmann said.

According to the report by the White House Council of Economic Advisers, certain professionals “can switch back and forth” between being a broker and a registered investment adviser, “a practice known as dual hatting.”

“As a result, consumers may not know” whether they’re receiving advice under “fiduciary” or “suitable” standards “at any moment,” it said in its report.

Even if someone signs the pledge or is in fact a fiduciary doesn’t mean problems can’t occur.

Last year, Seattle investment adviser Mark Spangler, a former chairman of the National Association of Personal Financial Advisors, was sentenced to 16 years in prison for wire fraud, money laundering and investment adviser fraud.

“The evidence at trial demonstrated that Spangler repeatedly violated his fiduciary duty as an investment adviser by hiding where his clients’ money was invested and by providing them with false account statements which, among other things, drastically inflated the value of their investments,” a Justice Department press release said.

The three brokers who handled the money of Al and Karin Betz aren’t formally named as parties in the arbitration action against National Securities, but combined have been named in about 20 customer complaints, including allegations of excessive trading and recommending unsuitable investments, according to FINRA. One had personal financial problems on his record, FINRA records show.

“National Securities denies all allegations contained in the statement of claim and intends to vigorously defend this action,” said the firm’s Chicago lawyer, Gara Seagraves of Baugh Dalton.

The Betzes’ claim alleges that National Securities failed to “reasonably supervise” the advisers and that the high turnover rate of their investment holdings should have been a red flag. “A turnover rate of six and above in all three retirement accounts should have led National Securities to shut these accounts down and review its agents’ conduct,” their claim said.

The turnover rate in the Betz accounts, in their names individually and as a married couple, ranged from 6.3 to 9.2, the number reflecting how often their investment holdings were replaced in a year.

Mutual funds that seek aggressive growth might have a turnover ratio of 1.2 a year, Stoltmann, their lawyer, said.

High turnover rates generate more fees and commissions for brokerages and, in turn, reduce returns for investors.

The Betzes, who have two sons and two grandchildren, said the money they lost equals about a quarter of their retirement savings. The rest of the couples’ retirement funds are in investment vehicles mirroring the Standard & Poor’s 500. The couple also receives Social Security.

Still, the losses have “pushed back our retirement,” Al Betz said in an interview.

The couple believe they’re entitled to damages of nearly $215,000, the amount they think their accounts would be worth had they not been mismanaged.

(c)2015 Chicago Tribune, Distributed by Tribune Content Agency, LLC

Photo: American Advisors Group via Flickr

More Than A Third Of Americans Have Saved Nothing For Retirement According To New Survey

By Becky Yerak, Chicago Tribune

More than a third of Americans have no retirement savings, and millennials feel more financially secure than other age groups despite being the least likely to have socked away any cash for their golden years, a new survey shows., a publisher of personal finance content, found that on average 36 percent of Americans haven’t saved any money for retirement.

Generally, the older the age group, the more likely it is that they are saving.

More than two-thirds of 18-to 29-year-olds have saved nothing for retirement, while 14 percent of people 65 and older have put nothing aside for retirement, found.

But despite their lack of retirement savings, millennials feel more financially secure and optimistic about their personal situations than other age groups.

The study was conducted on behalf of by Princeton Survey Research Associates International. It did phone interviews with 1,003 U.S. adults, nearly evenly divided between land lines and cell phones. The survey was conducted in English and Spanish over four days earlier this month. The margin of error is plus or minus 3.5 percentage points.

Among people ages 30 to 49, a third have no retirement savings.

AFP Photo/Emmanuel Dunand

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Disciplined IRS Workers Got Bonuses, Time Off

By Becky Yerak, Chicago Tribune

More than 2,800 Internal Revenue Service workers who recently had been disciplined received millions of dollars in bonuses and time off as part of an employee recognition program, a new government audit shows.

The IRS has a program that rewards its employees for a job well done, but a report released Tuesday by the Treasury inspector general for tax administration found that between Oct. 1, 2010, and Dec. 31, 2012, more than 2,800 recently disciplined IRS workers got more than $2.8 million in monetary awards and more than 27,000 hours in time-off awards.

The employee infractions included not paying their taxes.

“While not prohibited, providing awards to employees who have been disciplined for failing to pay federal taxes appears to create a conflict with the IRS’ charge of ensuring the integrity of the system of tax administration,” J. Russell George, Treasury inspector general for tax administration, said in a statement.

The watchdog conducted the audit because of new federal guidance issued in fiscal year 2011 that requires agencies to reduce spending on awards programs beginning in fiscal year 2012.

The inspector general recommends that the tax agency’s personnel chief institute a policy requiring management to consider conduct issues resulting in disciplinary actions, particularly the nonpayment of taxes, before awarding bonuses and paid time off. The inspector general said he has been assured by the IRS personnel chief that, by the end of June, the agency will study establishing a policy requiring management to consider disciplinary actions before giving out performance awards.

The audit also showed that most IRS workers get cash and time off in the agency’s award program.

For fiscal year 2011, the IRS awarded almost $92 million in cash and almost 520,000 hours of time off to 70,500 of its 104,400 workers. In fiscal 2012, it awarded $86 million in cash and almost 490,000 hours of time off to 67,870 of its 98,000 workers.

The audit didn’t find any violations with the IRS’ overall awards program, agency spokesman Jose Manuel Vejarano points out.

The IRS has developed a policy linking conduct to performance awards for executives and senior level employees, he said.

“Even without a formal policy in place, over the past four years, the IRS has not issued awards to any executives that were subject to a disciplinary action,” Vejarano said. “We are also considering a similar policy for the entire IRS workforce, which would be subject to negotiations with the National Treasury Employees Union.”

Photo via Wikimedia Commons