How many investors have lost their savings?

Just today (March 15, 2005), we received a letter from a member saying:

I have a friend who I have known for several years.
I was discussing SIPA with her and she said they are just now "recovering" from bad advice. He still works (70 years old).
I never knew this! How many more are there out there that don't discuss their losses?

We have heard from hundreds of investors who have lost significant portions of their life savings, and sometimes more than all. They trusted their advisors completely. Busy with their own professions and family responsibilities they relied upon their advisor for the management of their investments. They followed the advice provided.

There are widespread practices in the industry that often result in the depletion of investors' savings. Many have lost their savings investing in mutual funds. These investors believed mutual funds offered diversification and safety for their savings.

Some mutual fund dealers offer leveraged investment with a 2 for 1 plan or other leveraging scheme. The plan is fine for the dealer - it results in double the amount of assets under management, and for the registered representative - he earns double the commissions. The friendly bank who provides the loan is happy - more loans at high rates and guaranteed by the investor's assets with the dealer authorized to sell out the investor before there is any risk to the bank.

For investors it is a different story. It's fine if the market goes up strongly and generates a return greater than the cost of borrowing. If the market goes down, it's a different story.

To illustrate the point, one of our members, a widow in her sixties, living modestly and still working with a modest income, inherited $100,000. Her only investments had been bonds and GICs, and her savings were modest enough not to attract financial predators. She was encouraged to invest her newfound wealth. She invested in mutual funds with an advisor. At first she accepted to invest only in money market funds. Over a period of six months her advisor gained her confidence and he persuaded her to invbest in equity funds, and also arranged a loan from the friendly bank as approved in the account opening form. The widow says she was not awareof this clause when she signed.

Now she has $200,000 invested and a loan of $100,000. Over the next few months the account grows (negatively) to $170,000. She realizes she still must repay the bank - they are taking monthly payments - and she is down $30,000. This is more than her annual salary and more than she could save the rest of her life. She does not want to risk losing more of her nestegg and asks her advisor to get her out of these mutual funds.

Her advisor, who receives trailer fees for holding clients in, then tells her if she wants out there is a 7% redemption fee that applies not only to her initial $100,000 or the current amount of $170,000 but to the total of $200,000. This means a redemption fee of $14,000.

The widow is then faced with escaping from her mutual fund experience with $56,000. In less than two years her loss is 44% when she has placed her trust in her advisor and the mutual fund industry.

Is this fair?

How many more widows and seniors have received the same treatment?