As it was mentioned in the first post, the reason why I came up with the idea of starting this blog is because my family was victim of a fraud. You would think why am I here then and not in court fighting for whats mine? Well, it’s because, in fact, we were victims of a legal fraud. We already lost the trial, that’s why I prefer to use a nick name to refer to myself and all members of my family as well as for the names of the financial institutions involved in the fraud. The last thing I want to do is to loose my privacy in this process of demonstration against the system.
I feel the onlything it’s left for me at this point is to know that with this blog I will, hopefully, help other people avoid the kind of problem I had. Everyone should be aware of how the system is been made to protect the big guys, and keep the lower classes at the bottom.
To start, I want to put you all in situation and introduce y’all (a very little bit) to my family. We are a middle class family of four members. In order of age, my father comes first, he’s 62, business man in real state, now retired after selling his company. My mother, 59, works as a teacher in a primary school in our neighberhood. My brother 28, almost married to an amazing woman. He studied arquitecture and works as one in a studio. Then theres me, 24 years old, finance graduate. Currently working as a financial advisor in a local company. I’m the founder of this financial blog, but we work as a team. 3 colleges at work as financial advisors and here in the web as bloggers. This is all made by normal people with a middle class life, we all live in regular apartments in the city center of a European city like Barcelona.
Ok, so now, lets move on to the case study:
The thing starts around 2008. My dad was a successful man in the real state business, and somehow he predicted that the market was going to collapse. In fact, he was one of the first people in town to notice that, and then took the biggest decision in his life. Decided to sell the company with all assets to his business competitors for about 3 million Euros, fair market price at that time. Till here, everything fine. A man works all his life to build a company worth 3 million Euros to then sell it. He proved he was right, because in 2009-2010 the real state market collapsed in Spain, so he would have lost it all in that business.
So at some point he had the money. My father was not an expert in the financial sector. Completely the opposite, he was just financially illiterate, very innocent and he knew it. He knew he didn’t have the knowledge to manage money in the financial markets. So, after he recieved the money, he decided to go see the biggest banks in town and by having these interviews with the different banks then decide which one was the best to give his money to.
As a conservative and cautious person my father finally decided to divide the capital into 2 blocks. Gave the money to 2 different Banks but with different amounts of money to each of them, so the bank wich got the biggest block recieved 2 million. While the other bank, got the rest other million. I am going to focuse on the bank which got the biggest amount of money, because is the clearest example of what happened. But both banks behaved similarly.
My father was told he would have a financial advisor at all times. He was told that this advisor would look after his needs to adjust them with the profitability of the portfolio. On the other hand, the advisor knew my father was retired and didn’t have any income from any job. So my father needed to live out of that money, couldnt afford to loose it.
At the beggining of the comercial relationship between both parts, the bank made him sign a contract to clarify the type of investor he was. What they call the investor’s profile. From the explanation my father gave to the bank about his intentions, they deduced that he was a very conservative investor. That implies a low risk portfolio to ensure the maintainance of the capital in the future. So a low risk porfolio is what my father needed to have.
What im describing here is the process of a person who is putting his trust into someone else’s work. With trust, i mean, giving all your to a bank who knows, because you have told him, what you want and what you need from that money.
My father was asked regularly to meet the financial advisor and sign orders of buy and sell in many financial products like bonds, equity, hedge funds, and the most dangerous ones, the financial derivatives and structured products. In 2 years the bank managed to make him sign the orders to buy around 1.5 million Euros worth of derivatives and structured products from many different external financial institutions. By these I mean that weren’t their own products, every issuer of those products was independent from our bank and asset manager. Well, the result of that management was 1.5 million in loses in about 4 year, becasue the products were in periods up to 5 and 7 years long. No compensation of any kind as been given. Just an umpleasent “we are so sorry Mr. Prams”.
The funny part is that all financial products have commisions for the comercial deparment who sells it. Istudied finance at university, and I work in a financial advising company, for almost a year now. It’s well known in the financial sector, but it works in the real world too with other products, that, as more complex is a product, more complicated is to sell it, so higher is the commision. Structured products go up to 5% comision. So, compared with equity, or bonds where comissions go up to 0.4% or 0,5%, the structured products are expensive in terms of comissions.
Obviously, my dad is not a difficult customer, he is a puchover in this field. If an “expert” in the financial world tells him he is going to make money at the lowest risk he will accept the deal. So this means 75k (aprox) went directly to the banks balance sheet from the sell of those products to my father. And the rest of the capital to the issuer of the product, because a structured its a deposit or bond linked to an index or any other underlying. In other words, a structured product is a deposit that you give to a bank under some conditions on the interest rates you get in return, but if the economy shrinks, or even worst, it collapses, then there is a high chance you loose the whole deposit. What my father was told is that the interest rates could be low if the economy went bad, but in no case could loose the inicial investment.
The reason why the bank sold those products to my dad (and many other investors) was because in 2008 banks wanted to cover possible losses in stock price and obligations. The central banks interes rates were high, 3.5% in the EU. So the economy was at its highest levels of productivity. Companies and families were overindebted, and inflation was around 2%. All macroeconomic data were predicting a recession soon. These strategies of selling derivatives and structured products are only made by banks with the intention of covering their own portfolios against market loses. So, if their stocks and obligations fall in price, they know they will recieve the right to keep those deposits from the structured products and then compensate those loses they had in the stock market. It is legal, but not ethical when you put someone’s savings into those toxic products.
The law does not admit that there is a fraud in here. The bank only shows the fact that my father signed the order of buy the product to prove he wanted it. But being fair, these kind of products are not like smartphones where you can see if it works and if you like the colour, or whatever. You can not touch a financial product. You can not see it.
A very clear example to prove if a financial advisor is good or bad is by imagining the following case scenario: how much money would I have if I had put the money into a regular bank account, at a 0.2% interest rate, and I do my normal life, living out of that money. After 2 years how much money would I have had, and how much do I have now? The answer is obvious.
The conclusion here is hard to swallow, just coz’ a retired man has lost almost all his money due to a bad asset manager. An asset manager has made thousands of euros in comisions for a bank. A bank that has no legal responsibility… and this is probably an other case in hundreds of thousands that prove we live in a hostile world where the big guys eat the weakest just for a comision or a monthly target of sales.