|
Getting your Trinity Audio player ready...
|
The Securities and Exchange Commission has charged a San Ramon-based investment adviser for not disclosing a conflict of interest to investors that resulted in the receipt of $400,000 in excess commissions.
In an investigation conducted by the SEC’s San Francisco Regional Office, Valentine Capital Asset Management (VCAM) and its principal John Leo Valentine, 48, allegedly violated securities law for “switching his clients between two related investments without informing them that the switch would boost the commissions they had to pay.” VCAM is said to have more than 500 clients and about $211 million in assets under management.
Valentine responded to the charges saying, “The investment was suitable, very timely and profitable to the clients in 2008, a year in which the market was down heavy.”
“B shares were up 46 percent in 2008 and A shares up only 30 percent,” he said. “The exchange to the B shares proved profitable to the clients. And the clients were happy with the exchange.”
In 2005, Valentine allegedly advised his clients to invest in Series A of a managed futures fund where they would pay a 4 percent annual commission that would end in about 2-1/2 years when commissions reached 10 percent. The SEC reports that Valentine advised about 140 clients who had or were about to reach the 10 percent threshold to exchange some of Series A holdings for Series B of the same fund that was similar but with a higher leverage. Valentine reportedly didn’t make clear that the switch would result in restarting the commission payments.
“Investors are entitled to understand the fees they are being charged by their advisers and whether any conflicts of interest might be influencing the investment advice they are receiving,” Marc Fagel, director of the SEC’s San Francisco Regional Office, said in a statement. “Despite knowing that switching between funds would increase the costs to their clients, VCAM and Valentine did not fully disclose their conflicts in recommending the investment strategy.”
The investigation didn’t come about by client complaints, Valentino said.
“Our clients are very happy with it,” he said, adding that they had received many notes of gratitude from clients for the maneuver. “We can hold our head up high because our clients are happy with the return.”
In a statement released by the SEC, VCAM and Valentine were said to have settled the case without admitting or denying the findings and will return more than $400,000 in excess commissions to the clients and pay a $70,000 penalty.
“I’m glad that the issue is behind us,” Valentino said, “and we are looking forward to working hard for our clients.”
Mr Valentine states “… The investment was suitable, very timely and profitable to the clients in 2008 …”
Well, if it was appropriate and so successful, why did he agree to return $400,000 to investors?
He claims clents earned 46% (A Shares) & 30% (B Shares) in 2008.
Hmmmm, let’s see. The S&P Annualized return for 2008 was -37.22%. Gee, Mr Valentine must be some sort of financial whiz to produce a return over 80% higher than the market.
Then he charges his clients 4% per year (increasing to 10%) for the ‘privilege’ of his management expertise.
Judge Judy says “If it doesn’t make sense …it’s probably not true.”
Most intelligent consumers can invest on their own by learning about mutual funds, diversification & risk and staying away from Sharks that prey upon the clueless.
A simple apporach: Vanguard index funds (they track the market & have ultra low expenses), Quicken, solid credit union & Costco!
Why have a fund that tracks the market? Well, 80% of all funds typically don’t earn what the market makes plus their onerous operating fees & commissions erodes the shareholders’ interest.
What about those 20% that beat the market? Well, they change every year and it’s difficult to figure which ones will do it.
Over time, there has been only one fund that consistently beat the market over a 15+ year period (that streak was broken a few years ago).
So, why complicate your life … take the market index from Vanguard.
The problem is, you won’t be paying big commisions and fees “financial advisors”. Need financial advice? Pay a Certified Financial Planner (CFP) on an hourly basis for OBJECTIVE, UNBIASED advice.
I am a financial advisor in the community and I cannot speak to all the facts of the case, because we truly do not know exactly what happened. There is no doubt that Mr. Valentine should have disclosed the new commission structure.
My point is more to the fact that most individuals and even financial advisor only use stock and bonds in their portfolios and call that diversification. I commend Mr. Valentine for incorporating managed futures into the portfolio. It is an asset class that performs in the opposite direction of the stock market.
Therefore, his returns are correct – managed futures were way up in 2008 and historically (over every time frame that I can think of) have outperformed the S&P – especially over the past 10 years.
I have a question – is it better to earn 5% and pay no commission or earn 20% and pay a 5% commission and net 16%? That is exactly what managed futures have done. As Warren Buffet says, “cost is only an issue if there is an absence of value”. These decisions are a classic example of the value a financial advisor can bring. Most people don’t even know what a managed future is.
Not only do these perform, but they actually lower the risk of the portfolio. People say to index – it is cheap – you don’t need an advisor – why pay 1% per year – if you did that for the past 10 years you have made close to nothing. I can give you a list of mutual funds in every category that have outperformed their respective indexes over every time period.
It is also overwhelming shown that people who have an advisor have outperformed the markets. I believe that it makes sense to look for deals and to try and save money, BUT NOT WITH YOUR LIFE SAVINGS AND RETIREMENT DOLLARS. DO YOU GO TO THE CHEAPEST DOCTOR OR DO YOU OPERATE ON YOURSELF? Your retirement is very important and why try to cut corners and do it yourself.
It appears Valentine was using managed futures as a part of an overall diversified portfolio. This is a very reasonable recommendation for the appropriate client. The lack of disclosure of the commission is definately not a good and is worth the reprimand.
Bob in Danville states “Gee, Mr. Valentine must have been some sort of financial whiz in to produce a return 80% higher than the market (in 2008).”
Actually Bob, most managed futures funds where up anywhere 20% to 40% in 2008, depending on the amount of leverage utilized. This is very easy for you validate if you go to http://www.superfund.com or other managed future websites. If you are a sophisticated investor, you will know that mangaged futures (trend following) have consistently outperormed the Vanguard S&P 500 index over the last 30 years. Actaully, over the last 10 years, the managed futures index (CISDM CTA equal weighted) has compounded at an ROR of over 11% annually while the Vanguard 500 has compoundend at just -1% over that time.
Remember, Vanguard 500 index and other “long only” funds will only work if the market goes up. So you have to employ a long term “hope” strategy. Eveyone has their own definition of long term, but if you are a “long only, index, low cost investor” you have to “hope” the market goes up during your “long term” time horizon window. I “hope” it works out for you during your long term window. It hasn’t worked since 2000, so far.
There is a little known secret in the instituional world of investing that most self directed investors know – the market DOES NOT have to go up to make money. Take a look around and see why the most successful investors in the hedge fund world chage 2%, 3%, 4% management fees and 20% or more of the profits. They can charge it because they can and they have the performance to back it up.
Managed futures will continue to make money in all markets, regardless of direction, as there are unique trends and paterns in over 80 different futures markets around the world. The trends are up OR down, so there is no directional bias like and Vanguard 500.
With regard to Valentine: He simply did the wrong execution of the right idea, that’s all.
I know the Valentine Strategy personally, as i am a client. Valentine talked about overpriced Real Estate in 2006, and selling short overpriced oil and the world markets in 2008. Lets face it, he was right. These contracts went up 46% in 2008 and he sold in 2009. This more active strategy with a portion of your portfolio hedged the losses of the stock market, i obviously hired the right guy. Love the Chevron loyal!!
Bob doesn’t seem to have comprehended the article that well.
1. Bob describes the original commission structure as: “Then he charges his clients 4% per year (increasing to 10%) for the ‘privilege’ of his management expertise.” Whereas the article states that Valentine was going to be charging a total of 10% as commissions: 4% in the first year, 4% in the second year, and 2% in the first half of the third year. Then NO commissions. (“they would pay a 4 percent annual commission that would end in about 2-1/2 years when commissions reached 10 percent.”)
2. Bob essentially insinuates that Mr. Valentine was lying when “He claims clients earned 46% (A Shares) & 30% (B Shares) in 2008.” But Bob provides no real evidence or proof to support his allegation. (His unsubstantiated disbelief isn’t enough.) Further, the SEC didn’t conclude that Valentine’s investment decision–to switch his clients from B shares to A shares–was wrong at all or a bad investment decision at all or didn’t earn 46%.
3. So Valentine’s error was in not disclosing (whether unintentionally or intentionally) that the commission structure would RESET when the clients changed investments. So, instead of the commissions ending after the first 2.5 years, the commissions would start again at 4% for the first new year. So now Valentine is paying over those undisclosed commissions to his clients and also paying a $70,000 fine to the SEC.
Recently I was a juror in a court trial. They had a man up for murder. I told the other jurors, there is a reason why this guy is here. They didn’t pick him as he was roaming the streets! Although I agree for the most part with our judicial system, in the back of my mind I knew this guy’s lawyer needed to convince me he was innocent. Ended up he was guilty, as well all voted that way. And, so it goes with Mr. Valentine. Check this guy out on brokercheck.finra.org. This man has a history of these types of situations, way, way too many to say it was just dumb luck or he was in the wrong place. Where there’s smoke….there is usually fire.
Skip E WORKS for John Valentine. The SEC doesn’t fine advisors for making money for their clients. The fine was for FRAUD. Read the charges, Skip. Valentine WILLINGLY withheld the facts from his clients.
My friend was a client of his and said all clients were taken out of the fund as soon as the regulators started asking questions. THEN Valentine put them in a fund called Willowbridge that LOST money in 09 and is STILL down over 10% this year. By the way, willowbridge pays Valentine 3% a year WITHOUT limit.
And last, but not least, my friends STOCK portfolio that Valentine managed in 08 LOST 50%
Bad broker, bad advisor
Right or wrong, I put more of the blame on Valentine’s clients. It’s called due diligence. It’s your money, pay attention and stay involved. Valentine’s work isn’t pro bono. He’s not controlling all that cash just for the fun of it – he’s out to make a profit, just like any other financial manager.