Castle Rock Investment Company

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Cases

Rouge Broker Steals $1.3 Million From an 89-Year old!

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By Mack Bekeza

On July 2016, FINRA discovered that Travis Wetzel, a former broker who was originally barred from the industry in 2013, had been making fraudulent annuity withdrawal requests for an 89-year old’s Variable Annuity with Prudential. Once Prudential got wind of this, it immediately investigated the situation and discovered that the withdrawals were being made from an account in the broker’s wife’s maiden name! Overall, there were a total of 114 withdrawals made to this account between July 2010 through September 2012. Unfortunately for Prudential, even though it responded promptly and reimbursed the 89-year old, it was fined $950,000 by FINRA for failing to spot this while the withdrawals were being made.

Even though this story seems to be very unfortunate for both the 89-year old and Prudential, things like this happen more frequently than most people would think. For instance, MetLife was fined $25 million dollars for similar reasons. And, on top of that, LPL has paid over $12 million in fines and restitution for failing to supervise fraud in variable annuities, non-traded REITS, and even certain ETFs.

Since variable annuities are complex products that are mostly sold to the elderly, FINRA places a very high level of scrutiny on possible fraudulent activity. And, it can be quite a task for brokers to spot these transactions since they process millions of transactions on a daily basis. So, being able to spot fraudulent activity the minute it happens can be nearly impossible. In fact, it can take up to a couple of years to find out what exactly happened!

Is there anything the client can do to avoid these mishaps? Fortunately, yes, there is! Individuals can hire a financial advisor, such as Castle Rock Investment Company, that operates as a fiduciary to help them make the right choices and not get sucked in by a dishonest broker. Another thing that a client can do is look up their broker or investment advisor through FINRA’s Broker-Check website to see if they have had previous client complaints. Although most financial professionals are honest people, it is important that individuals seeking financial advice do their homework to see if they are walking into a trap.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

The People’s Best Interest…The Battle Continues

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By Mack Bekeza

The official ruling for “fiduciaries,” meaning people who are legally bound in the best interest of retirement investors, will not take effect until April of 2017. However, the Department of Labor (“The DOL”) has been bombarded by lawsuits. This brings us to the recent filing from the National Association for Fixed Annuities (“NAFA”) in June 2016 with regards to how the ruling is defining a “fiduciary,” along with other material in the ruling.

Before we get into what exactly NAFA is complaining about, let’s review how the DOL defines a “fiduciary, which is:

“Any person who exercises any discretionary authority or control respecting the management or disposition of its assets or has any discretionary authority or responsibility in the administration of the plan” as well as “any person who renders investment advice for a fee”. [1]

So, what exactly is NAFA complaining about? According to them, “Congress intended ERISA fiduciary duties to apply only to those who participate in ongoing management of a plan or its assets.” As we mentioned in the previous paragraph, this is not the case. NAFA completely disregarded that fiduciaries are those who render investment advice for a fee. Put it this way, an annuity can play a large role in someone’s retirement, so how would selling annuities to people not be considered rendering investment advice?

Another claim made by NAFA was in regards to how the DOL is allegedly “exceeding its authority by imposing ERISA fiduciary obligation on parties to transactions involving IRAs.” Again, NAFA has it wrong. Although investment advisors to IRAs are considered fiduciaries, those individuals are not subject to the same scrutiny that an ERISA fiduciary would be.

This case is an excellent example of how people who work in the commission-based side of the financial services industry are trying to keep their industry alive. They realize that (as of late April 2017) their ways will no longer work for them in the marketplace, so they are desperate to fight this. Keeping things how they are now can lead to many retirement investors losing billions of their hard earned dollars from commissions and expensive products.

Attached is a link to the article that we used as a reference. And, for those who want to see the DOL’s official response to NAFA, click here! However, just a warning, the official response is about 105 pages long.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at info@castlerockinvesting.com or via phone at 303-719-7523

[1] As a note, Castle Rock Investment Company falls under the DOL’s definition of a fiduciary for both ERISA plans and IRAs.

Supreme Court to Fiduciaries: You Must Monitor Your Plans’ Investments!

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Screen Shot 2015-06-10 at 10.13.07 PMCastle Rock Investment Company wanted to update you on a recent significant Supreme Court case. Last month, the United States Supreme Court issued a unanimous decision (9-0) in Tibble v. Edison International, ruling that plan sponsors are not only responsible for reviewing retirement plan investments but that they also have a “continuing duty to monitor trust investments and remove imprudent ones.” This decision was in favor of a 401(k) plan participant and overturned a previous ruling of the 9th Circuit of Appeals that was in favor of Edison International.

The ruling declared that the company’s fiduciaries did not uphold their responsibility to monitor three higher-cost retail mutual funds, when “materially equivalent and cheaper institutional shares existed.” Basically, the plan kept higher-cost retail class funds when lower-cost wholesale class versions of those funds were available. This resulted in the participants unnecessarily paying higher fees.

To sum up the case, Justice Stephen Breyer wrote, “ERISA’s fiduciary duty is derived from the common law of trusts, which provides that a trustee has a continuing duty–separate and apart from the duty to exercise prudence in selecting investments at the outset—to monitor, and remove imprudent, trust investments.”

This case has huge implications for plan sponsors, plan fiduciaries, and the entire industry. It could open the door for more claims that fiduciaries failed to properly monitor plan investments. However, the Court did not go into detail on what fiduciaries’ monitoring duties actually entail, so future implications remain somewhat uncertain. What can be gleaned from it is that fiduciaries have the responsibility to periodically monitor their plans’ investments.

If you have any questions or comments on the implications of this case, please feel free to contact Castle Rock Investment Company at 303-725-7086.