Pete Bush, co-founder of Horizon Wealth Management, is telling staff members to prepare for two years’ worth of new business in the next three to six months as the frozen assets of former Stanford Group clients are unfrozen.
“The first couple phone calls I got, they were in a little bit of disbelief: ‘That money can’t be all lost, right? Because it was in a bank?’” Bush says. “Now, a couple of the more recent callers have come to some acceptance that they may not get anything out of that bank, but their other money will eventually come back to them.”
As of March 2, only one Stanford employee—chief investment officer Laura Pendergest-Holt—had been arrested in connection with the investigation into the alleged $8 billion fraud. But the sheer scale of the unfolding scandal is slowly coming into focus, and if the worst fears are realized, some victims will be nearly wiped out. Many people who still have money to invest might not be able to trust anyone with their savings for a while—if ever—and even those who didn’t get burned might be looking at their financial adviser with a bit more suspicion than usual.
“When things like this happen, it undermines the trust in the entire industry,” Bush says. “Everything is called into question. It makes it tough on good guys who are doing things the right way, who have to answer questions and suspicions that are really unfounded but really understandable.”
Bush often explains that a firm like his doesn’t have its own investment funds or access to an exotic offshore bank. The client doesn’t write a check directly to Horizon. An independent compliance officer and independent custodian of assets provide checks and balances to the system. With a Robert Allen Stanford or a Bernard Madoff, no one is looking over their shoulders to make sure they’re investing in what they say they’re investing in.
“I think clients that have been hurt and are seeking a new adviser are looking are looking beyond personality; they’re going to investigate,” says Ed Shobe of The Shobe Financial Group. “They’re really going to be asking those questions and seeking those assurances. That’s really the basis upon which client-adviser relationships are based. No adviser can tell you what the markets are going to do; they can speculate. All you can do is create a strategy and in retrospect look back and hope it was the right strategy.”
When conversations at downtown lunch spots and happy hours turn to Stanford, one of the most common questions is about guilt. If the SEC is right about Stanford, did the local advisers know? Or were they duped, too? Advisers say trust is built between two people; almost no one trusts institutions, Bush says.
Candace Blasi-Gary knows this better than most. Blasi & Associates is a franchise of Ameriprise, which has received its share of bad press in recent years, but she says customers usually don’t associate the larger company with the firm her father started in 1970.
“It’s not just about the money,” she says. “We insist that the clients go on this journey with us. You must be in the driver’s seat.”
In this litigious age, Blasi-Gary wants to make sure clients “get” what they’ve got. Letters are exchanged between client and advisor, spelling out exactly what the client is buying and why. If they don’t understand how an investment works, they shouldn’t put their money in it.
Blasi-Gary generally speaks first with her clients about financial planning. Once the analysis is done and the relationship is established, the customer often brings up asset management, she says. One customer with accounts at Stanford had already hired Blasi & Associates on retainer for financial planning when the scandal broke. The man’s statement lists 15 to 20 mutual funds, which at the moment he can’t touch. Blasi-Gary told her staff to send in transfer paperwork and see what happens.
“Those monies should not be frozen, but I think the SEC just had to shut the door until they could figure out what’s going on,” she says. “This poor guy is just saying, ‘If I had come to you last year, my money wouldn’t be there anymore.’”
IF IT SOUNDS TOO GOOD TO BE TRUE …
You know the rest. But beyond that old saw, financial consultant Ron Menard has a few tips for gun-shy investors:
• Don’t give your money directly to any manager, only to a bona fide custodial firm.
• If questions are discouraged, you should be too.
• Be sure the adviser and/or seller are licensed.
• If admittance into the “club” is only for a “special” group, you don’t want to join.
• If your investment statements are indecipherable as to how they are calculated, be wary.
• If the investment process is based upon a “secret sauce” that can’t be explained, you may want a different recipe.