Mohammed Khan of Vancouver, British Columbia, is suing his former financial advisor Catherine Jones for $2.3 million.
In 2007, Mr. Khan won $3.9 million (Canadian) in the lottery.
The lawsuit alleges that Ms. Jones assured Khan that he would make $50,000 per month from his investment of $3.5 million.
Assuming this is true, and if Mr. Khan had known anything at all about investing, such an assurance alone was plenty to raise some red flags.
Why? Such a return equates to more than 17 percent a year.
There’s no legitimate investment out there that can assure you of such a return on an ongoing basis.
Yes, there are years in which the stock market returns 17 percent or above. There are also years in which it lose 17%, 25%, 30% or more.
And in the long term, such a number is way outside of the historical average of the stock market. This tends to run around 10%, more or less. And it’s probably going to be “less” for the next 20 or 30 years.
17% a year is even further outside of the long-term average of the bond market, which usually returns less than stocks over time.
In other words, it’s way too good to be true.
Any time sometime tells you something that’s too good to be true, you should run for the hills — especially if it has to do with their promise to invest your money. Something is not right, and you don’t want to stay around and find out exactly what.
The lawsuit alleges that Ms. Jones engaged in day trading with Khan’s account, including repeatedly buying and selling the same stock, sometimes several times in a day.
This practice (coincidentally) earned Jones more and more in the way of commissions.
This is known in the financial business as “churning.”
Mr. Khan apparently didn’t even read his financial statements, instead relying on Ms. Jones to tell him how much money he had. The lawsuit alleges that she lied, giving him inflated numbers.
Jones has a couple of significant disciplinary events on her record. However, these seem to have occurred after she was hired by Khan.
There are a few obvious lessons here. First, don’t just entrust your money to whoever makes you the biggest promises. That’s a recipe for certain disaster. Second, check your financial advisor’s disciplinary record. Third, read your own financial statements!
Of course, the big problem here is that many lottery winners like Mr. Khan will never find or follow this advice. And unfortunately, there’s a limit to what can be done about that.