Annual Retirement Guide July 2, 2008, 11:16PM EST

Ruined by 401(k) Predators

(page 6 of 6)

Schapiro, CEO of the Financial Industry Regulatory Authority (FINRA) Danuta Otfinowski

Borg, of the Alabama Securities Commission Ann States

Financial adviser Congdon couldn't match Kazacos' pitches Sophie Olmsted/Redux

null

Kazacos' sales pitch was difficult for other advisers to match. Mark Congdon of the advisory firm Horizon Group remembers losing prospective clients to Kazacos for years. For most people in retirement, Congdon would put 10 years' of living expenses into safe investments and allow them to take out no more than 4% a year from their accounts. "It was amazing how many people ended up telling me they're going with Mike Kazacos," says Congdon. "One of the reasons was that I wasn't allowing them to withdraw enough."

According to the lawsuit and interviews with former colleagues and customers, Kazacos' financial maneuvering was more aggressive. These people say his strategy seems to have boiled down to one goal: moving money into and out of various accounts to generate maximum fees. Kazacos would start by putting their money into Morgan Stanley mutual funds, which were among the industry's most expensive. After this, say clients, Kazacos would move assets out of the Morgan Stanley funds and into a variable annuity that owned Morgan funds, which had a 5% or greater commission. According to former colleagues, Kazacos was chummy with the salesman of that product, inviting him to his lake house.

Next, say clients, Kazacos would typically shift assets out of the annuity and into Morgan Stanley's Portfolio Architect, a managed-account program that charges clients 1.5% on top of the standard mutual fund fees. At each step Kazacos collected commissions and fees. Gourevitch, his lawyer, says the strategy was solid, allocating money in a balanced way through diversified stock and bond funds. The attorney denies that Kazacos moved assets into the managed account program.

A former employee at the Rochester branch says Kazacos may have made investment moves without clients' permission. Toni Liversage, Kazacos' sales assistant from 1993-96, was in charge of supplying brokers with investment order forms. Liversage claims she saw Kazacos sign clients' names on documents, which is against FINRA rules. Liversage says that when she raised concerns with the branch manager, Miller, she was told to "mind your own business." Morgan Stanley declined to comment on the allegations. Kazacos' attorney calls them "utterly false." Miller's attorney, Howard R. Elisofon at Herrick Feinstein, says: "Not only is it untrue, but to my knowledge no customer has ever made such an allegation."

A few years ago, some of Kazacos' clients began to notice that their account balances were falling quickly. Bob Geter, an ex-Kodak sales manager, had been lured by Kazacos' promise of double-digit returns. The father of two retired at 58 in 1996 with a $315,489 nestegg. Geter says he called Kazacos in 2005 after his balance plunged. "He told me to have confidence and said he didn't get where he was by not knowing what he was doing," says Geter.

All-Too-Similar Tales

Geter decided to do the calculations himself, and his numbers showed the account would run dry within two years. He says he then started calling Kazacos more frequently but was passed off to one of the broker's sons, who also worked in the office and who told him to get a job. In an arbitration case in which similar allegations were made, Kazacos said in a 2002 hearing: "I tried to respond the best that I could to remedy their concerns, to ease their concerns; and every time they called, I was there."

One Sunday morning, Rochester attorney Robert J. Pearl was on the radio talking about investors' rights. After the show, he received a call from a client of Kazacos who had grown worried about his diminishing account balance. Word spread that Pearl had taken the case of the former Kodak employee, and soon the attorney was deluged with calls. By February, Pearl had filed four arbitration claims with regulators on behalf of roughly 40 clients from Kodak and Xerox. According to public records, Morgan Stanley has paid out more than $2.5 million on those claims against Kazacos and Isabella.

Disgruntled customers continued to come forth, forming the basis for the lawsuits in January. At Kazacos' urging, Romano, an industrial hygienist, had retired in 1995, handing the broker $169,218 to manage; nine years later the balance had dropped to $57,787. It was much the same for Stephen Skuza, a former Sears repairman who has taken a part-time delivery job at Auto�Zone (AZO) now that he has only $35,000 in his account, down from $189,684. "Kazacos put us in a big hole," he says.

Now some clients from the Rochester branch are turning to other local financial firms for help. But building trust with these customers has been difficult. Congdon, who lost business to Kazacos, says he can offer little solace now: "Once I looked at the devastation, I said 'I can't help you. But a resume writer can, because you're going back to work.'"

Business Exchange related topics:
Baby Boomer Retirement
Retirement Strategies
Financial Advisers

"Ruined by 401(k) Predators" (Special Report, July 14 & 21) misstated the amount of money expected to shift from pension funds and 401(k) accounts into the hands of new retirees. Roughly $5.1 trillion will change hands by 2011, according to Financial Research Corp. Some $20 trillion will roll over by 2046, according to Morgan Stanley (MS).

Der Hovanesian is Banking editor for BusinessWeek in New York.

Reader Discussion

 

BW Mall - Sponsored Links

Buy a link now!