Steve’s Note: Dave, (on the right) is a friend. We had many dinners, lunches and went on a trip to Mexico’s Copper Canyon. He is more than a friend, he is a father figure that I never had, as my biological father died when I was 13. But Dave is NOT MY FINANCIAL ADVISER.
A TALE of TWO CRISES
A cautionary tale [lesson: never mix a financial adviser and a close friend)
by Guest Author: Jordon (Steve) Brooks, retired Los Angeles Unified School District teacher
This is a tale of a series of unfortunate events (to quote the book series) but also one of being careful with one’s investments and to be proactive regarding them. This is your money, protect it at all costs.
My story begins as a teacher. I wanted to invest in my retirement, so over the years, I had taken out a couple of TSAs [tax-sheltered annuities] from various companies. I had enough money and had 403bs for my retirement; some fixed and some variable annuities that were vested in the financial l market, all very conservative. I also had my home, which was my largest and most important asset. I also had invested in the stock market to develop my portfolio, again, a very conservative portfolio.
All was going well with my first financial adviser.
I relied on professionals to oversee my investments as I really did not understand the stock market or investment strategies nor did I have the time to deal with it myself given the rigors of teaching.
Then along came another financial adviser [and a friend]
It was someone I had known for quite a while and over time we developed a good friendship so it did not start out as a business relationship but as a friendship. At some point, he offered to take a look at my investments and advise me. I thought it a good idea. He seemed to know his stuff. He had his MBA, was highly successful, taught financial planning at a community college, and was even an SEC judge [U. S. Securities and Exchange Commission, a federal bureaucracy to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation]; an impressive resume and set of credentials. And as a friend, I felt that I could trust him. He said that I was doing fine but said that he had products that would greatly increase my return on investment. He also offered to consolidate some of my investments into one. So I went along with it. There was one investment that I had borrowed on to buy a house so there was an outstanding loan on that TSA [Tax-sheltered Annuity]. He told me the best way was to pay off the loan, however, I did not have the resources to do so. But then said, if I did move that TSA without paying off the loan that I would just have to pay the taxes on it but that in the new investment I would have a much greater return. He insisted that there would be no penalty, just having to pay the taxes. So I decided to consolidate my investment into one that he offered.
The first problem occurred when I discovered that there was money being taken out of my paycheck which I had authorized, but it was not going into the new plan. I questioned him monthly and he said that it was in the works and that he had checked with the company and it would be showing up shortly. Finally, after about six months, I called the company direct and they had no record of taking over that payment. So where was my money going? I called the old company and discovered that it was being sent to them, but because I had closed that account it was just held in a suspense account. I was able to get that money back. But this led me to be suspicious of his business practices.
He obviously lied to me.
The second problem occurred when I did my taxes. I did have that loan that I did not repay and received a 1099 or something for it from the company from whom I had borrowed the money. I reported that on my taxes and paid the taxes on it. Later that year I received a bill from the IRS. I did not know the reason. I had reported the cashout and paid the taxes. They informed me that because I did an early withdrawal that there is a penalty and a large one at that. So I had to pay not only the taxes but also a large penalty.
Again, he was wrong.
But now as I watched my account, my money was decreasing in value every month. This was at a time when the market was going up. Also, I had other accounts that I had not moved that were increasing in value. Why was this one decreasing? I questioned him regularly, but he just said it was the market. I also knew that there was a third party management company that was overseeing my account. He had told me about this but said it would be worth it as they were very good at what they did and would increase my returns greatly. This was costing me 2% of my money. I wondered why there was a need to hire an independent company to do this. Surely my friend should have been advising them as to what to buy or sell.
Commissions! Always Hiding.
That was what he received his commissions for. Having worked in insurance I knew that commissions on sales were something unseen to the clients. So I questioned him about the commission he received and especially in regards to hiring a third-party management firm which was costing me. My attitude was that that was what he got his commission for. At first, he flatly denied that he had received any commission. He said he was doing me a favor. A lie for sure. An agent does not work for free and deserves his commission for the sales. However, no one ever sees these, as they are internal commissions and depends on the deal that the agent has struck with the company. They are paid directly by the company to the agent without the client having any knowledge. I knew this well from my years as a commercial lines underwriter in the insurance industry before becoming a teacher. Surely an agent deserves his commissions. Nobody works for free. But he flatly denied taking any commission for the sale. This resulted in a major argument until at last he agreed and admitted that yes, he had received the commission for the sale.
“Oh that commission,” he said. Damn liar, I thought.
Eventually, I called the company direct and explained my dilemma. They said that this was happening often so they now offered financial advice for free which allowed me to stay with them and get rid of the third party manager. Unfortunately, I had signed up for a seven-year contract so taking the money out would have resulted in a large penalty. So I fired the third party manager and my agent friend and let the company advise me as to where to put my money. He remained my friend, but this was business.
Once my seven years was up I took it out of this company and moved it to Vanguard which is now where most of my money is. I had to learn about investments but it was worth it and saves me a lot of money.
At the same time this was going on and before I fired him as my financial adviser, I was watching my TSAs (at least the ones under his management) go down. And I had my portfolio of stocks and bonds. So my agent friend said it would be a good idea to diversify my portfolio with property investments. I had a house with a lot of equity. It was the house of my dreams. I had worked hard to buy it and had done a lot of renovations to make it just the house I always wanted. He said that I could leverage that house and buy more properties. Sounded like good advice. “One always makes money on property investments” I was told and have heard elsewhere. Remember this was before I had fired him as my financial adviser.
So I refinanced my home, took some cash out and decided to look for property. At the time I did not realize that this would later jeopardize my keeping of the home. But I felt financially stable and did not foresee any problems and felt ready to start making my money work for me and to continue my investment strategies. I was ready for the next step.
Because LA prices were so high, he and I went to the Palm Springs area for fun but also to look at properties where prices were more reasonable. We found a very nice condo. It was in a country club on a golf course. Not really my style but he and I thought it a good investment. Plus I could rent it out as a vacation rental and have the use of it for myself when I wanted to. I was also thinking ahead. Eventually, when I retired I would have a house in LA and a place in Palm Springs. Sounded like a good plan. So I paid cash for it. There was no mortgage. This worked out well for a couple of years. Although I did not make money, I was breaking even every year and because of the loss, I got more money back on my taxes which made it work. His advice was that I could pay higher taxes, or take that money and invest in something that would increase in value, namely a property. So while it was a wash financially it seemed like a good move to use that money to invest rather than just pay the IRS. I thought it a good idea to invest in my future. Keep in mind that this was all with his advice. He also purchased three properties in the same complex. So in a way, his advice was valid. At least I thought so as it was working as he had said.
Since that had worked out so well, with his advice, he [my friend and financial adviser] and I looked to Florida for more investments.
He had bought 6 properties in and around Ft. Lauderdale. According to him, they were good investments. And the same tax incentive would work; lowering my taxes to pay for these properties. Also, the concern was that because Palm Springs was mostly second homes that it was a more volatile investment. So again, it was all about diversification. Plus the thought of having a place in LA, a place in Palm Springs and a place in Ft Lauderdale when I retired was appealing to me. I was building my property portfolio. I also had family in Florida so that was another incentive. So he and I journeyed to Florida, again a pleasure trip but also to look for more investments. So again, with his advice, I took the money that I had from taking out a mortgage on my Palm Springs home and was able to buy two condos in Ft. Lauderdale. Instead of buying one outright, I used my money to put a down payment on two. Both were in very nice complexes; on lakes, with guards, clubhouses, and only 4 miles to the beach. One was in a complex in which he also owned properties and was also where we stayed. Eventually, when I retired I would have one for me and one as a rental. All was going well. Looking back, with my salary, I should never have invested in properties, especially in Florida 3000 miles away. But I got caught up in the whole housing situation and was following his advice. Mind you if I have been able to continue working the situation might have been much different but due to unforeseen issues, it turned out to be a big mistake.
Then tragedy struck. I had a massive heart attack
I was out of work for six months but was eventually able to return although it was tough. Then I continued with more heart attacks and another heart condition. Again I was out of work. At this time I was in the emergency room about once a month. I was constantly having cardiac events. Just as an aside, I have congestive heart failure, I have five stents, I have had five angiograms and 5 EPS studies. So I was in pretty bad shape. Well, I had to make a decision. I was definitely not ready to retire. I loved teaching and looked forward to going to school, at least on most days. I did return to school for a short while as I made a deal with my principal that I would work part time and see how I did. But daily I was faced with cardiac events and had to tell my students that I needed to rest. So I would put my head down on my desk wondering if I needed to call 911. Well, this is no way to teach. I really did not want to leave a job I loved and certainly, this was not a good time financially for me, but my health was the issue. So I decided to leave. I applied for disability/retirement as luckily I was old enough for that.
Now I had to have a new plan
My dreams of multiple homes were not going to be a reality. The first step was to sell my house in LA. It was my dream home and I hated to give it up, but now with the higher mortgage, and other expenses I had no choice. Looking back, if I had not invested in the other homes I may have been able to stay there, but that ship had sailed. Next step was to move into my Palm Springs condo. Stay there for two years to avoid capital gains, and then sell it. In the meantime, I would sell the Ft. Lauderdale condos.
I first had to get my disability approved before making any moves. I did so. I immediately put my house on the market. It sold rather quickly. Funny side note: Unfortunately, I had not planned on selling it so quickly and because I did not want to lose out on the high seasonal rents that I received in the Palm Springs condo, I had rented it out for the season of January, February, March, and April. My house in LA closed in December. So I had to get out. But I had nowhere to go. My condo in Palm Springs was rented. So there I was with three condos, one in Palm Springs and two in Ft Lauderdale, but I was homeless. This was a rather funny predicament. So I stayed with my sister in Florida for a month, and then rented a room in Palm Springs (coincidentally with my financial adviser friend) until I could move into my condo in May.
OMG! Race Horses?!
I did receive a good sum of money from the sale of my house in LA. My financial adviser friend said he had a great deal for me. Race Horses. He wanted me to take all that money and invest in racehorses. He assured me that there would be at least a 25% return on my investment. [Steve’s comment: this guy never stops! Jordan had a massive heart attack and almost died and his financial adviser recommended race horses!]
I told him absolutely not.
I was not going to take that sort of risk under the circumstances. I was wising up. More bad advice. Hadn’t he done enough damage? In fact, I do know of one person who did invest in the racehorses. It took him many years to get his money back and in the end, lost money. So I took my money and put it with another financial adviser who I had worked with. He had one of my last TSAs and had done well with it and with other friends of mine. He did well with it for a while, but because it was investment money and not TSAs there was a charge of 2%. Eventually, with the advice of my attorney, I moved it all from him to Vanguard to avoid paying that 2%, and in fact even he thought it was a great idea and offered me any help in the matter. I was a small account and he dealt with huge accounts so did not really have the time to devote to it. I did have to learn the investment world; stocks, bonds etc., but at least I was in charge of my own money. I am not a day trader or anything, but just keep tabs on my own investments now that I am retired. So, there are some good and honorable financial planners out there.
2008 financial collapse was in full swing
Now back to the houses. By the time I got settled into my Palm Springs house, the financial collapse was in full swing. So this was a double whammy for me, my heart attack and having to retire, and a financial collapse at the same time. My condos in Florida were now upside down with my mortgages more than they were worth. The condos I had bought in Florida for $200,000 were now selling for $30,000. A rather substantial loss. So any plans of selling them were out of the question. Another obstacle regarding my plan. By the way, in California one can just walk away from a mortgage and the bank will foreclose and the bank gets the property. But Florida, I learned, is what is called a recourse state, so when one walks away, the bank sells the property and then the prior owner must pay the difference. So walking away was not an option. With those prices, I would be hit will bills well over $100,000 each. Most people go bankrupt in Florida to get rid of their mortgage, but I could not do that due to my investments. So I was stuck. I hoped that the home market would pick up. Who could not afford a condo for $30,000? Plus because of the financial collapse, my rents went down but my expenses stayed the same, so I was losing a lot of money every month just keeping them going. The money I would much rather have spent on other things. My savings was dwindling away. Eventually I was able to get rid of one in a short sale and because of my great agent there got a non-recourse judgment in the sale; however, the bank did issue me a 1099 for $100,000 as a forgiveness of debt. So I had to claim that $100,000 as income on my taxes. Thanks to my great CPA and all the losses I had incurred over the years, the result was not too bad, but it could have been devastating. I kept the other condo as it was nicer, got better rents, and was close to breaking even with what I owed the bank. Although I would prefer to sell it, it currently is at least breaking even with the expenses.
Consequently, because I have too many mortgages I do not qualify for a new mortgage even if I were to sell my condo in Palm Springs. The HOAs are high so it does cost a lot to live here but it makes no sense to sell and just rent. But I would much rather have a nice small house here. So I kiddingly say “Help! I am trapped living in a country club in Palm Springs.” I look forward to the day that I can sell the Florida condo, sell the one in Palm Springs that I am living in and move on. I have been stuck here for almost 10 years. I guess my situation is not as bad as some, but certainly not what I had planned.
I certainly cannot blame my financial adviser friend for the collapse of the financial market or my heart attack. I was just hit by two crises at the same time; one a health crisis, the other a financial crisis. And it was I who made the final decisions so I certainly share in the fault. I got caught up.
But, I do think he offered me some very bad advice
I should never have bought that many properties, too much leveraging and way too risky. He put me into losing financial products where I lost a lot of money. And he made some major errors in doing so, just to get the account. If this is how he treats his friends, I can only imagine how he treats his other clients. In all, I have lost somewhere between $250,000 and $500,000 due to bad investments etc. Of course, everyone lost a lot of money due to the financial meltdown; I am not alone in that. I lost money in my other investments as well; in my portfolio, and my TSAs. I always maintained a fairly conservative portfolio but was still not safe from the financial issues that faced our nation. But some of this could have been prevented, and I only tell of the ones where I was completely lied to or encouraged to make some risky investments that were well beyond the reach of what I should have done. I just think of all the other things I could have done with that money. But I thought I was doing the right thing in investing in my future and having a diversified portfolio. But who could have predicted that all this would happen?
I am not trying to bad mouth all financial advisers. There are good ones and bad ones. I have worked with other financial planners and had good luck. The one I had most of my stock portfolio in was very good. When I retired I decided to learn the investment world and now, for the most part, I am in control of my own money. So I offer this mostly as a cautionary tale. There are good financial planners who really look out for their clients best interests, and there are those who are just out for their commission and will say anything to get it and will also give really bad advice. There are also safe investments and risky investments. Mind you, at the time I did not think my investments were all that risky; the financial market with stocks and bonds (and I always maintained a relatively conservative portfolio) and property. I guess what I am trying to say is be very careful.
As a final note, after all, he has done to me; my financial adviser friend is still my friend. [Steve’s comment: WHAT?!] Most of my other friends will have nothing to do with him as he has done them wrong as well, and think it inexcusable what he did to me and do not understand the reason he remains my friend. I can separate business from friendship. I would not trust him with a dime of my money, but we can still go out and have a good time.
I guess I am just too forgiving.
Steve’s debriefing on Jordon’s incredible 403(b) story, his health problems, 2008 financial disaster, and the terrible advice from his adviser
Jordon’s story is the most extreme 403b stories I have ever heard. But it is more than just getting sold a 403(b) annuity.
Here are the many common-sense money management skills that were violated by this financial adviser:
- He was a terrible financial adviser and a terrible friend too.
- It involved two many real estate investments because he trusted this financial adviser who made the same real estate investments.
- No good friend would recommend another stressful decision after a heart attack that almost killed Jordan.
Jordon story is just incredible, and it’s deep and profound. It is doubly complicated because he is STILL friends with this adviser who recommended that he put “all” of his money in racehorses! Jordon finally said NO! I was so angry at my adviser, I vowed to write a book and to learn to manage my money without any adviser.
Think about this for a minute: In the real world, no genuine fiduciary adviser in the private sector 401k world would ever recommend racehorses or lie about commissions, otherwise, those advisers risk losing their license or going to jail. But the 403(b) adviser behaviors are not only allowed but protected by state ludicrous insurance codes. Currently, Jordan is financially stable in retirement, despite what he said about starting late with investing, bought real estate at the worst time ever, and just losing so much money because he had to start over. He is investing in individual stocks right now in hopes of gaining some of his losses. I nor his friends don’t understand how he could forgive his financial adviser, and that is the basic problem with having a friend as your financial adviser. Objectivity goes out the window. I am grateful that he wanted me to share his story with you.
[Steve’s comment: this is absolutely egregious: no fiduciary financial adviser would ever recommend to cash out a 403(b) before 59.5 to put into an investment because the adviser thinks the new investment will return more than the 403(b)!]
Stephen A. Schullo, Ph.D. (UCLA ’96) taught in the Los Angeles Unified School District (LAUSD) for 24 years and UCLA Extension teaching educational technology to student teachers. Steve wrote investment articles for the United Teacher-Los Angeles (UTLA) union newspaper for 13 years. Thrice featured retirement plan advocate in the Los Angeles Times and U.S. News and World Report. He co-founded an investor self-help group 403bAware for teacher colleagues and wrote 7,500 posts in three investment forums since 1997. Frequently quoted by the media, testified at California State legislative hearings and honored with the “Unsung Hero” award by UTLA for his retirement planning advocacy.
For the last twelve years, he serves as a volunteer on LAUSD’s Investment Advisory Committee as a “Member-at-Large” and former co-chair. The committee contains collective bargaining reps from the unions and monitors the district’s tax-deferred retirement plans, 457b/403b, of 55,000 former and current LAUSD employees, worth $2.5 billion in total assets.
He started this blog in 2012 to help all PreK-12 public school educators nationwide, especially his Los Angeles Unified School District colleagues. He belongs to a small national group of 403(b) advocates (mostly teachers) who want to bring closer attention to the 403(b). During the last 20 years, over 30 newspaper articles have been published and each one says the same thing, TSAs (Tax Sheltered Annuities) are terrible plans and the salesperson gets the benefit from lucrative commissions and high costs. Nobody in the educational establishment reads these