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      Wall Street Potholes

      Copyright © 2016 by Simon Lack. All rights reserved.

      Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

      Published simultaneously in Canada.

      No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

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       Library of Congress Cataloging-in-Publication Data

      Lack, Simon, 1962- author.

      Wall Street potholes: insights from top money managers on avoiding dangerous products / Simon Lack.

      pages cm

      Includes bibliographical references and index.

      ISBN 978-1-119-09327-5 (cloth) – ISBN 978-1-119-09329-9 (ePDF) – ISBN 978-1-119-09325-1 (epub)

      1. Investments. 2. Portfolio management. 3. Finance, Personal. I. Title.

      HG4521.L25 2016

      332.6 – dc23

      2015029534

      Cover Design: Wiley

      Cover Image: © iStock.com/Mlenny

      Preface

      Financiers were never especially well liked prior to the financial crisis of 2008. The bank bailouts compounded a general belief that bankers always make money regardless of the outcomes for their clients. This popular view had never sat easily with me as one who had made his career first in London and then on Wall Street. Although there were inevitably bad actors, I clung to the idea that part of the reputational challenge was the result of poor understanding by the general public.

      Then I met Penelope, as described in Chapter 1, and was prompted to learn about non-traded REITs (real estate investment trusts), a murky corner of the securities markets that can only damage the reputation of anybody involved in the sale of these instruments to the general public. The fees, conflicts of interest, disingenuous marketing, and more fees were breathtaking. That it was all legal, because of its disclosure via a thick, densely written prospectus, was astonishing.

      Discussions with industry colleagues found like-minded practitioners with their own examples of shoddy, self-interested advice provided to trusting clients. It soon became clear that a collection of advice from people on the inside would fill a needed gap in the education available to people simply trying to save for retirement.

      The CFA Institute's efforts to shape the “Future of Finance,” and especially the Putting Investors First initiative, provided further impetus to promote better outcomes by warning against the wrong types of advice and products. Too often, the financial salesperson's interests are placed well ahead of the client's.

      It is with this goal in mind, of Putting Investors First and thereby aiding better outcomes, that the five authors of this book have come together. The few we may offend are far less important than the many we hope to help.

      Acknowledgments

      Inspiration for this book came from my contributing authors Kevin Brolley, John Burke, Bob Centrella, and David Pasi. We all share a common vision that investing should be simpler, cheaper, and devoid of fee-laden traps. Further encouragement was provided by many other finance professionals, including Rich Covington and Tony Loviscek.

      In my career I have had the good fortune to work repeatedly for people in banking for whom integrity was priceless, notably Don Layton, Don Wilson III, David Puth, and Jeffery Larsen. They represent the best of finance and what I still believe is the vast majority of financiers, notwithstanding the visible transgressions of some. Their values became mine.

      The CFA Institute with its “Future of Finance” initiative, including Putting Investors First, promotes financial ethics as a cornerstone of investment competence, providing an institutional confirmation of the importance of doing the right thing.

      The wonderful editing staff at John Wiley once again both shared our vision on an important topic and immeasurably improved the final result.

Chapter 1

      Non-traded REITs: A Security That Shouldn't Exist

      Poor Advice

      “I'm afraid you've been poorly advised,” I told the new client as she sat in my office. That was certainly an understatement – in fact, she'd been ripped off by the advisor at the brokerage firm that invested her money.

      We had just finished reviewing the investments in her portfolio, which she had brought to me out of dissatisfaction with her existing advisor. It was a familiar discussion for me. I have worked in finance my entire life, mostly in New York, but early in my career I was in London. Since 2009 I've run my own investment business helping clients from individuals to institutions invest their money. The 23 years I spent at JPMorgan and the banks that preceded its many mergers was great preparation. During that time, I managed derivatives trading through enormous growth and at times high volatility; oversaw traders handling risks across multiple products and currencies; and more recently, led a business that helped new hedge funds get off the ground. I had seen Wall Street and “The City” (London's financial district) from the inside. It had been a great career, but by 2009, I was ready for a new challenge. The daily commute was increasingly a mind-numbing grind, and big financial companies were likely to face ever-greater constraints on their activities. The politics of financial reform understandably reflected public abhorrence at the required level of support from the US government following the 2008 financial crisis.

      I was and remain very proud of my career at JPMorgan. The company emerged from 2008 in better shape than any of its

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