Dan Solin: How Do Brokers View Nuns and Teachers?

As potential victims, of course.

They both have the perfect profile: Unsophisticated investors. Trusting and caring people who place the interest of others over self-interest.

Enter the slick broker.

The victimized nun wasn’t your regular nun. At age 64, she inherited $532,000 in mutual funds from her deceased mother. But she had a problem. She had taken a vow of poverty. She wanted the money to go to her religious order.

Her friendly broker was just the person to guide her back into poverty. He cashed out $125,000 of her holdings and instructed her to endorse the check and return it to him. She did so and he deposited the funds into his personal account.

But she wasn’t broke yet. There was more work to do. In a somewhat convoluted scheme, he scammed her out of the balance of her holdings and deposited those funds into his personal account as well.

Fortunately, the broker put his ill-gotten gains to good use. He formed a company geared to marketing his investment services to athletes!

Was the broker with a pump and dump operation? Not exactly. He was employed by Legg Mason which was acquired by Citigroup.

All of this was too much for FINRA, the toothless tiger that “self regulates” its colleagues in the securities industry. It barred the broker for life.

What about the teacher?

She had significant funds in an IRA account. An insurance agent authorized by her school district to pitch annuities to teachers as part of their 403(b) plans, met with her in the teacher’s lounge. He had a great deal for her. How about taking her IRA account and investing it in an Equity Indexed Annuity?

Under the best of circumstances, Equity Indexed Annuities are very dubious investments.

A former SEC economist noted that they have “high hidden costs” and “extraordinary commissions”.

Putting an Equity Indexed Annuity within an IRA would almost never make sense. IRA’s are already tax deferred and subject to penalties for early withdrawals. The teacher is being charged for the tax deferral benefit of an Equity Indexed Annuity which she already had in her IRA. In addition, this annuity imposed a fifteen year penalty period for withdrawals, which makes extricating from it very expensive.

The agent was pretty happy. Sales of these “insurance products” typically generate up-front commissions ranging from 5%-10%.

I have this theory about market beating advisors and brokers. When they talk about “retirement planning”, it means they are planing to retire with your assets. When they talk about “wealth management”, it means they are managing to transfer your wealth to them.

You don’t have to be a nun or a teacher to be a victim.

But it helps.

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