Financial advisers and stockbrokers will sometimes double down on bad investments when they really should be running as fast as they can away from them.
No one knows the mind of another, but firms and individual brokers and financial advisers make such desperate calls for two reasons, to my thinking.
First, the broker or adviser goes to the well again in the foolish hope that the bond or real estate investment trust that's tanking and that his client owns will somehow miraculously rebound and he'll look like the hero.
Or, more perniciously, the broker or adviser recommends the product with problems for an easy sale and the desire to milk some more commission dollars from clients.
There are indications that either one of those two scenarios may have occurred with sales of GWG Holdings Inc. bonds. Last month, GWG, which sold $1.6 billion in bonds backed by life settlements through a network of about 140 independent broker-dealers, said it had voluntarily filed for Chapter 11 bankruptcy protection, a widely anticipated move. There is no way to immediately understand what value, if any, those bonds have.
In its bankruptcy filing, GWG essentially blamed the Securities and Exchange Commission's investigation of broker-dealers that sold the life settlement bonds for its collapse. One forensic accountant, Gordon Yale, said such reasoning was nonsense.
Yale told InvestmentNews that, from 2015 forward, GWG Holdings struggled to generate cash flow from operations. “That meant it was always dependent on being able to raise additional capital from debt or equity.”
There were plenty of other red flags about the GWG bonds, which paid brokers handsome commissions when they sold them to clients. In 2019, GWG twice told the SEC and the public in filings it wasn't going to be able to file its quarterly or annual financial statements on time, always a danger sign. And when the company eventually filed an annual report in March 2020, it warned of "several material weaknesses" linked to, among a list of items, the financial reporting process and insufficient accounting resources.
In that same time period of 2018 and 2019, GWG undertook a complicated financial transaction with the Beneficient Company Group, an unrelated company, to create a startup financial services business with the aim of diversifying GWG, Yale said. Beneficient’s management eventually took over GWG, only to separate from the company last November.
That's a ton of noise for financial advisers to make sense of in order to recommend or sell a product. But broker-dealers and their reps kept selling GWG's life settlement-backed bonds, marketed as L Bonds, despite all the accounting and reporting static. The "proceeds from issuance of L bonds" — meaning the cash inflow — to GWG was $265 million in 2018; it climbed the next year to $403.4 million before peaking at $440.2 million in 2020, according to its annual reports.
"The primary reason this company existed from 2015 forward was its ability to find people to buy its L Bonds, the life settlement bonds," Yale said this week. "That was the biggest source of capital."
In the midst of this, Centaurus Financial Inc., with 640 brokers and advisers, boosted the amount of GWG's L Bonds that its brokers could sell to clients, according to plaintiff's attorney August Iorio.
In an email from a Centaurus Financial broker to a client in April 2020, the broker says that the firm had raised the maximum or "cap" on GWG sales. The prior maximum, Iorio noted, had been $100,000 or no more than 10% of the customer’s net worth, excluding primary residence, whichever was lower.
"The cap from GWG has been lifted to 150K," the broker wrote. "Wanted to let you know if you would like to add funds from your money market."
"According to my conversations with Centaurus Financial customers, brokers hounded their clients after the cap was raised to invest up to the new max," Iorio said.
The general counsel for Centaurus Financial, Paul King, didn't return calls this week to comment.
Financial advisers make incorrect calls all the time to their clients, who should understand that all investments come with risks, some small, some large. No one is perfect, but advisers are supposed to be prudent and mitigate losses.
And boosting the amount of money a client could risk with a company like GWG, which was waving red flags to the market like a toreador shakes his cape at a bullfight, was not prudence. It was folly.
Chicago-based Mesirow Fiduciary Solutions adds flexPATH's plan-level outsourced fiduciary book, boosting its retirement market reach to $164 billion.
Also, Raymond James's employee advisor channel adds breakaways from Wells Fargo and Stifel, while UBS welcomes an ex-Morgan Stanley duo in Indiana.
It promised guaranteed principal and 10% monthly returns. The SEC says it invested nothing.
Ten years after entering the fee-based annuity market, MassMutual Ascend says nearly half its lifetime sales came in the past two years alone – but barriers remain among fee-only advisors.
Amplify, WealthReach, Zeplyn and Zocks have unveiled partnerships aimed at automating portfolio management, content creation, account opening, and client communication.
Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains
Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income
