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I opened an account in California with a major investment company late
last year and used a financial adviser that had been recommended by a
friend. My investments were picked by my adviser (and agreed to by
me) with the understanding that my investing approach was
conservative. As a result, 50% went into bonds (WaMu) and 50% into a
few different mutual funds.
At the time, the WaMu bonds were investment grade and there was no way
to know what was going to happen.
The problem is, as the WaMu situation got more dicey and the bonds
started to get riskier, my adviser reassured me that there was no need
to worry, WaMu would never go under, worst case it would be bought by
some other bank.
Well, WaMu went under and the bonds are pretty much worthless.
I know that my adviser never did anything in order that he would
benefit at my expense, but I feel that I was certainly not given the
best advice given my conservative outlook. Of course hind sight is
20/20. My question, is there any legal recourse when an adviser
doesn't give you advice that's inline with your risk level and you
suffer as a result?
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On Sep 29, 6:12 am, l...@g...com wrote:
> My question, is there any legal recourse when an adviser
> doesn't give you advice that's inline with your risk level and you
> suffer as a result?
>
I believe it depends on two things: accepted parameters for
diversification; and the company your advisor works for. It seems to
me you have a good argument, depending on the amounts of money
involved, that your bond holdings were under-diversified. E.g. if you
had 100k in bodns, it should have been 20k in each of five issues. If
the amounts involved were not enough for adequate diversification, he
should have put you into CD's or a savings account. If the firm your
paid advisor works for is good, they may agree to settle in mediation
proceedings.
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On Sep 29, 12:40 pm, dapperdobbs <G...@h...com> wrote:
> I believe it depends on two things: accepted parameters for
> diversification; and the company your advisor works for. It seems to
> me you have a good argument, depending on the amounts of money
> involved, that your bond holdings were under-diversified. E.g. if you
> had 100k in bodns, it should have been 20k in each of five issues. If
> the amounts involved were not enough for adequate diversification, he
> should have put you into CD's or a savings account. If the firm your
> paid advisor works for is good, they may agree to settle in mediation
> proceedings.
Technically, the OP wants to know if there is recourse *because the
risk level was unsuitable*. For that question (perhaps the wrong
question) the answer is likely "no". Losses from investments that were
otherwise suitable to the client at the time pf purchase are not
recoverable. "Diversification suitablility" aside, if an adviser
performs due diligence on an investment and makes all the proper
disclosures (prospectus, etc) he is not likely to be found liable for
subsequent market losses.
For the record, I too think that the advisor failed to properly
diversify the bonds. As you said, if the dollar amount in question was
so low that transaction costs became prohibitive, then invididual
bonds should have been forgone for other fixed income investments. If
the OP has a claim it's through this avenue, not because his
investments lost money.
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<l...@g...com> wrote
re an investment in late 2007
> At the time, the WaMu bonds were investment grade and
> there was no way
> to know what was going to happen.
> The problem is, as the WaMu situation got more dicey and
> the bonds
> started to get riskier, my adviser reassured me that there
> was no need
> to worry, WaMu would never go under, worst case it would
> be bought by
> some other bank.
snip
> is there any legal recourse when an adviser
> doesn't give you advice that's inline with your risk level
> and you
> suffer as a result?
My answer would depend on how much you originally invested.
If we are talking about, ballpark, $15k or less invested in
the WaMu bonds, then I would be less inclined to protest the
advisor's actions. Given small amounts such as $15k or less,
diversifying with bonds could be said to be tricky, due to
transaction expenses of buying several companies' bonds.
OTOH, if the amount was this low, arguably the advisor
should have put you in a bond mutual fund. On the third
hand, the yield likely was not as good on the bond mutual
fund. Did he compare the two yields (WaMu bonds and a bond
fund) for you? Did you say anything about preferring the
higher yield?
If we are talking about more than about $15k, then I agree
with dapperdobbs and kastnna's point re diversifying.
But, the situation is further complicated by the difficulty
of reading financial institutions' accounting statements. I
do not mean that these are complex (though they are). I mean
that even those well acquainted with the complexity were
fooled. Warren Buffett bought around half a billion dollars
of Bank of America stock in mid-2007. It declined by around
50% in the next year. It has recovered some but it is still
far below Buffett's purchase price. If Buffett and his
people could not see the massive writedowns (for commercial
banks) on subprime mortgages coming, who could?
This argues for exculpating your advisor. It is an anomalous
time. Many (most?) are taking a beating in their portfolios.
Nearly everyone is furious and looking for satisfaction.
That bailout bill that went to the House today failed IMO as
much because people do not trust anyone right now. The
merits of the bill being a viable solution to the credit
crisis were hardly considered.
We all "want our money back." The wise among us will
concede, "I knew there were risks. Black swan events etc. do
occur. Easy come, easy go. Here is what I will do next time
to avoid this loss."
For the little it is probably worth, the following site says
that the FDIC will pay 30 cents on the dollar for some, but
not all, WaMu bonds. I would not get my hopes up; just
noting that it's worth checking.
http://www.philly.com/philly/blogs/inq-phillydeals/D
id_FDIC_doom_Wachovia_by_stiffing_WaMu_investors.htm
l
Elle
Individual Investor; I am not paid for my comments.
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h...@g...com wrote:
> Given small amounts such as $15k or less,
> diversifying with bonds could be said to be tricky, due to
> transaction expenses of buying several companies' bonds.
> OTOH, if the amount was this low, arguably the advisor
> should have put you in a bond mutual fund. On the third
> hand, the yield likely was not as good on the bond mutual
> fund.
Elle those are good points...one thing you brought up that I want to get
feedback about - this issue of individual bonds vs. bond funds. I'm
repeatedly surprised by the willingness of individual investors to buy
relatively large & concentrated bond positions, when it's so easy to own
a diversified portfolio of hundreds of bonds via a low-cost mutual fund.
I have this discussion with clients too and this comes up from time to
time here on MIFP - one frequent poster was quoted in the WSJ about
losses on WorldCom bonds some years ago.
The principal objection I hear is this idea of a bond having a fixed
maturity date, but the bond fund not having that. For some strange
reason that's bad and there is this appeal of "well if I hold it I get
my money so who cares what happens along the way." In talking it through
it's easy to show the bond fund's lack of a maturity date as being
somewhat irrelevant, and the bond's "fixed value" being illusory, but I
can understand the idea anyway. And as we see from this thread what
happens along the way can introduce a lot more risk/uncertainty than any
bond mutual fund will have.
The notion of a potential 100% downside should give people more pause,
especially when the difference in yield is relatively small. And by
definition, the more higher corporate bond yields are associated with
the riskier issues so it seems this scenario comes up more than it should.
The other thing I've seen, which I also find surprising, is how many of
the capital raises by distressed firms end up in individual investor
portfolios - i.e. the bonds are sold to retail rather than institutional
investors. Ford was one example as I recall. These financial issues over
the past year have been another. I don't understand why an individual
investor looking for an investment in the fixed income (read:
conservative) part of the portfolio would gravitate to that kind of
offering instead of say a Treasury bond or a high-grade corporate bond
mutual fund. Again, lots of downside potential with a limited upside for
what is supposed to be the "stable" piece of the asset allocation pie.
To the OP - did you consider this issue at time of purchase - that
holding one bond implicitly increases your risk vs. holding a few
hundred of them? Why did you go that route?
-Tad
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"TB" <b...@p...net> wrote in message
news:5ZhEk.1686$x%.1444@nlpi070.nbdc.sbc.com...
> h...@g...com wrote:
>
> The principal objection I hear is this idea of a bond having a fixed
> maturity date, but the bond fund not having that. For some strange reason
> that's bad and there is this appeal of "well if I hold it I get my money
> so who cares what happens along the way." In talking it through it's easy
> to show the bond fund's lack of a maturity date as being somewhat
> irrelevant,
When I first started investing, a financial manager told me about getting
his parents to buy a bond mutual fund. He explained it thusly: if you buy a
cow for the amount of milk it will give you, why do you care how much the
cow is worth on any given day?
This made it vastly simple for me to understand the volatility that might
arise in income funds. Not that I was buying income funds back then, but
it's something I've never forgotten, and has really helped me in the nerves
department for investing in general.
Elizabeth Richardson
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