Robert Neubecker, New York Times

Signs that it's time for a new broker

  • Article by: RON LIEBER
  • New York Times
  • February 14, 2013 - 11:56 AM


Every so often, a story so perfectly illustrates what can go wrong when you trust someone with your money that it serves as a kind of user’s manual for any investor who comes along afterward.

And so it is with the tale of Philip David Horn, the Wells Fargo broker who recently pleaded guilty to trading in ­clients’ accounts, canceling the trades and helping himself to the profits. He may very well end up in jail, just as soon as the federal judge can figure out how much money is at stake and how to make those clients whole.

All the juicy stuff is here, as my colleagues Jessica Silver-Greenberg and Susanne Craig reported in January. There are the country club solicitations (and confrontations), the ­brokerage firm that finally figured out what was going on after more than two years and the chastened Horn putting 800 hours into volunteer work and begging the judge to keep him out of prison.

But on the other side of those trades were sophisticated clients, including a lawyer and retired pharmaceutical and aerospace executives. They didn’t notice what was going on, something that Wells Fargo’s lawyer pointed out at a hearing last month in Los Angeles.

So should Horn’s clients have seen this coming? In hindsight, there were four signs that things weren’t quite right.


Broker bragging: Horn reportedly bragged on the Braemar Country Club golf course in ­Tarzana, Calif., about his trades and then pulled paper records out of the trunk of his car in the country club parking lot to back up his boasts.

This is objectively odd behavior. Pitches should take place in an office or at a meeting spot of a potential client’s choosing, over a sober deck of PowerPoint slides perhaps.

And if financial advisers are going to toot their own horns about the good they’ve done for others, you should be hearing about how they persuaded clients not to sell all of their stocks in the first quarter of 2009 when stocks were at their nadir, even though they desperately wanted to.

If brokers want to brag about past performance, however, ask them this: Can you show me audited long-term results across every part of all of your clients’ portfolios?


Broker trading: The couple who suffered the most losses had multiple accounts with Horn, and their monthly statements, in aggregate, often ran more than 300 pages. Horn hid his in-and-out trading among all that verbiage.

Like it or not, if you’re putting your money in somebody else’s hands, you have the responsibility to read every line of your statements every month. People like Horn, who was a friend to many of his clients until he wasn’t, count on the fact that you won’t.

“I think the victims were picked because they weren’t paying attention to their accounts, because each and every trade was documented,” said Stephen Young, Wells ­Fargo’s outside counsel in this case, according to a transcript of a sentencing hearing in January.

Then if there is a lot of trading going on, you have the right to ask why. In a 1999 paper in the American Economic Review titled “Do Investors Trade Too Much?” Terrance Odean, now a professor the Haas School of Business at the University of California, Berkeley, answered in the affirmative.

His 1999 research, which examined a group of discount brokerage customers, found that on average the things investors buy actually underperform the things they held in the first place. Their returns are reduced through ­trading.

The question for your gunslinging broker, then, is this: What makes you so much smarter than everyone else in the market?


Broker flamboyance: In 2011, Horn invited some of his clients to his 1970s-themed 50th birthday party. It was at his country club, and he handed out CDs that said “Phil’s Saturday Night Fever” on it with his head pasted in where John Travolta’s should have been.

This is all in good fun, but the moment I saw it I immediately thought of the classic investing book “Where Are the Customers’ Yachts?” by Fred Schwed Jr., which is named for the question asked by a curious visitor to New York who had seen bankers’ and brokers’ boats in the harbor and thought something might be amiss.

If I had gotten an invitation like this, I would have wondered where my broker was when the self-awareness genes were being handed out.


Your complacency: Some of Horn’s clients considered him a friend. But that’s what confidence men count on, because they know that the most trusting among their clients will let their guards down.

Others figured that because he worked for a big brokerage shop, there must be people looking over his shoulder. “This wasn’t just Schlepper & Schlepper,” as one client said. But if we’ve learned anything at this point, it’s that we should be more wary of people who work for large financial institutions, not less.

Horn’s marks were themselves sophisticated. Once you’ve achieved a certain station in life, it’s easy to fall into the trap of thinking that you know a thief when you see one or that you’ll recognize a crooked scheme before the crook has taken you in. But most successful people do not, in fact, know enough about the ins and outs of investing to see through fraud when it’s happening.

“I’m not here to blame the victims because it’s not their fault,” said Young, Wells Fargo’s outside lawyer at the hearing. “But it does show up on their confirmation slips, it does show up on their monthly statements, and it was never caught by any of the 16 victims.”

Horn was not legally bound to act in his clients’ best interests in this case and was only required to provide “suitable” investments. Still, according to Raschelle Burton, a Wells Fargo spokeswoman, “the clients’ needs should always come first” regardless of the level of duty required.

So that’s a good place to start with anyone who wants to manage your money. Is the person willing to sign a fiduciary oath like the one that the National Association of Personal Financial Advisors helpfully provides to assist its members, who compete against garden-variety stockbrokers?

Still, the warning signs were there. If you happen to run into an adviser prone to bragging, trading and disco parties at country clubs, check yourself to see whether you may have been just a bit too complacent.

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