Most retired investors trust and rely on a financial professional to manage their retirement assets. Many people do not know that, because of this trust relationship, financial professionals owe their customers a fiduciary duty to act in their best interest and to recommend investments that are appropriate for their investment needs. If financial professionals breach their fiduciary obligations by giving inappropriate financial advice, they and their firm may be held liable to their customers for the damages caused by the bad advice.
In recent years, many telephone company retirees have elected to take the lump sum payout option over the traditional pension. Many retirees elected the lump sum option based on the advice of trusted financial professionals who recommended the lump sum because it purportedly would provide the retiree with higher monthly retirement income and the opportunity to grow the investment with little or no risk. In truth, in many cases, the financial professional improperly recommended the lump sum option solely because it was the only way that his or her firm could gain control of the retirement assets and generate commissions.
There are many warning signs indicating that a retiree who elected the lump sum pension option has been a victim of bad investment advice. In general, retirees with valid claims were promised investment results that did not come true. For example, many people who retired in 2000 were told by their financial advisors to elect the lump sum option because the stock market would increase on average at least 10%-12% per year and, therefore, the advisor recommended that the retiree could withdraw 6%-10% annually from their account and still grow their investments with little to no risk.
In truth, financial studies available to those advisors in 2000 stated that an investor could only withdraw 4% per year without risk of invading their principal investment. Furthermore, the financial advisor in many cases failed adequately to disclose the amount of risk it takes to receive a return of 10%-12% per year.
This bad financial advice turned out to be disastrous for many retirees during that time period because the market soon crashed and caused many retirees to lose their retirement “nest egg.” The rapid market loss magnified the negative effects of the withdrawals in the account. As a result of this bad advice, many telephone company retirees have had to seek work again because the financial professional misled them about their investments by overstating the benefits of the lump sum option, by locking them into excessive withdrawal rates and by exposing their portfolios to excessive risk without adequate disclosure. Even worse, most do not understand that they were misled and furthermore do not understand that they have legal rights to recover the losses that they sustained.
For example, in March 2007, the Maryland Securities Commissioner filed an Order to Show Cause against Joseph R. Karsner, IV, Joe Karsner and Legacy Financial Services, Inc. for recommending that employees of AT&T, Verizon and Bell Atlantic take the lump sum payout prior to the age of 59 1/2 and invest in unsuitable investments such as variable annuities and mutual funds. According to the Order, Karsner falsely promised that his clients could live of their retirement funds until they died and could earn a guaranteed 12% return on variable annuities, 7% return on fixed annuities and 4.5% return in a money market.
The type of unscrupulous actions described in the Maryland Securities Commissioner’s Order to Show Cause is very common and widespread throughout the country. These scams often begin with a free seminar at a local restaurant and end with financial ruin. Page Perry has successfully represented retirees of major telecommunications companies against brokerage firms for engaging in this type of conduct and has worked with the Communication Workers of America (CWA) to help prevent these problems before they arise.