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Published as: “Getting Blood From a Stone” (Financial services industry complaint mismanagement), Bloomberg Money, October 2004.
by Brian Bloch
Financial firms and advisors are a pleasure to deal with as long as things go well. But when the market plunges and you discover that what you got is the opposite of what they promised and you ask for money back, that charm can mutate into devious complaint mismanagement that you would never have believed possible.
Why do firms do this? The sad truth is that the already minimal ethics of the financial services industry generally terminate immediately and totally in the case of a complaint. Paying out damages is costly and sets nasty precedents. Also, most clients cannot afford legal action and ombudsmen tend to favour the industry. Consequently, the tricks and ploys described below work most of the time. They shouldn’t, but they do.
No matter how much you lose and why, the only thing a firm is ever likely to admit is "that the results were very disappointing". Firms use this infamous cop-out to give the impression that they are sorry about your losses, but fate was against you. In other words, “tough luck and now please go away. We did nothing wrong”.
If you still push, the next thing they will probably tell you is that it's all your fault. Financial service firms are notorious for pointing the finger back at the client: "you wanted these shares and we gave you all necessary risk warnings".
Legal experts criticise firms for using the "sophisticated investor trick". Genuinely sophisticated investors who really knew what they were getting and who got what was promised, shouldn’t complain about losses. But firms are trying their luck when they allege that perfectly innocent victims are experienced investors, because they put a few thousand pounds in a mutual fund five ago.
To add insult to injury, no matter what you told the firm at the time of investment, it may claim that because your money was in equities, you are risk friendly. Because of some trivial little investment somewhere sometime, janitors, truck drivers, brick layers and just about anyone, have been labelled as sophisticated, experienced, risk-friendly investors.
Not only do firms love to distort whose idea the investment was in the first place, but they try and pass off the most vague disclaimers as explicit warnings. Buried away beneath a flashy graph showing impressive capital gains in the past, there may have been some tiny print stating that shares can go down as well as up. In the event of a complaint, this will be presented as a perfectly adequate warning that you could lose a third of your money within six months.
Likewise, the temptingly labelled Dynamic Hi-Tech Growth Fund probably boasted about wide-ranging and risk-reducing diversification. But it would have lost you 90 per cent of your money in 2001. People who complained about such funds were told that no one could have predicted that the market would crash like that. "Only with the benefit of hindsight can you say...". The fact that many people did predict this and that markets have been bubbling and bursting for at least 700 years, is something the firms prefer to forget.
The "hindsight ploy" is a favourite and can be applied to almost anything. Firm's love to claim that at the time of investment, what they did was financially correct. They couldn’t know what would happen in the market! Most clients don't have the knowledge or evidence to prove otherwise.
In order to maximise their own revenue, firms often do what experts have been advising against for a hundred years! For example, sufficient diversification between shares, bonds and cash has been the basis of investment since at least 1900. Nonetheless, putting all the client’s eggs into the most risky but commission-heavy investment, remains one of the biggest dangers for investors.
But it gets far worse. Unethical firms will reformulate your complaint so they can negate it. For instance, if you remind a firm of its promise to take "rapid reaction in the face of market change" and point out that they did nothing at all, they may write that "we never claimed we could eliminate losses". This is not, of course, what you are complaining about.
Even worse, I have known a firm to claim that "no action was deemed necessary at that time". Unfortunately for the investor, that time extended from 2000 to 2002 - the entire bear market.
Financial firms also have a habit of misinterpreting and playing semantic games with documents including their own contracts. For instance, a firm’s contract stated quite clearly that equity investment was only for the long term - not less than five years. When they lost somebody money by advising him into the stock market for only two years, they tried to argue that two years is “medium to long-term". Their outrageous “logic” was that two years is the start of the medium term which ends at the beginning of the long term! So two years is “not inconsistent with the long term” after all.
But for those less imaginative firms, the simplest and most effective of all strategies is to ignore most of what you write or say. No matter how much evidence you send or how relevant it is, it can be totally ignored. An investor once collected brochures from 20 investment companies all over the world in order to prove that the firm got the asset allocation all wrong. He sent his entire collection to the firm with a crystal clear explanation. In their reply, the firm ignored the lot – not one word about the package of brochures. They fobbed off his complaint with a vaguely related, but irrelevant argument about investment strategy.
What does this all mean for the average investor? For a start, you need to shop around before you buy. But if you already bought and lost, you may need lawyers and accountants to force the firm to face up to what they did and pay up. This is a long and stressful process, but when you know you were taken for a ride and lost a lot of money due to mismanagement and broken promises, don’t let them get away with it.
In 1999, a large investment company advised a man who had told them he did "not want to take any big risks" to put 75 per cent of his money into the stock market. This money was just about all he had. "These blue chip shares are pretty safe", they told him. In late 2001, he realised what had been happening in the stock market, that this had never been a suitable investment for him and sold all the shares. If he had waited much longer, he would have lost a lot more. The investor complained to the firm about losing 30% of his money. The firm refused to admit any liability or offer him any compensation. Instead, they wrote him some amazingly distorted and false "justifications". Let's compare some of them with the truth:
| What the firm wrote | The truth |
| Decisions to purchase were made to take advantage of highly performing stocks. Such action was certainly in line with market sentiment. | We got carried away with the general market euphoria, went with the "herd" and dumped all your money into an overheated and overpriced market. |
| You asked us to build up a portfolio of blue equities for you. |
We advised you to put all your money into the stock market. That blue chip story was just sales talk. We should have advised to you put most of your money into bonds and cash. (Although blue chip shares are safer than a lot of others, they are still relatively risky investments. Recently, an investor was awarded full damages because of this exact piece of bad and misleading advice.) |
| In late 2001, you became risk averse. | In late 2001, you realised we were gambling away your money. |
| The investment manager selects stocks that are appropriate for each individual client’s portfolio. | We buy the same shares for everyone at a big discount. |
| Our client agreement explains our medium risk strategy in detail. | Our explanation of a medium risk portfolio is vague and meaningless, what you got was really high risk, and you should have had a low-risk portfolio anyway. |