The Bucket Shop
I find it ironic that Ray Lucia has trademarked the term "Bucketeer", which is also a reference to someone who runs a "bucket shop". A bucket shop is not technically what Lucia runs (you can read the various definitions here: http://en.wikipedia.org/wiki/Bucket_shop
) as I will not go so far as to allege it is fraudulent. However, his business practices raise a lot of questions in my mind and I think should interest others as well. Ray's website is http://www.raylucia.com
I came upon Lucia only in the past couple of weeks when looking for others like David Lerner who are big sellers of non-traded REITs. Lucia is a big proponent and his affiliated firms look like they sell a reasonable amount (though it is impossible to tell from public filings how much). RJL Wealth Management ("RJLWM"), which is a Registered Investment Adviser, or RIA, run by Ray's son, Raymond J. Lucia, Jr. RJLWM has about $400m in discretionary assets under management and another $1.2bn held in accounts with First Allied Securities, Inc. They have another $122m in annuity products. Ray Lucia, Sr. solicits prospective clients through his seminars, TV show and radio show for RJLWM under the auspices of his own RIA, Raymond J. Lucia Companies, Inc. ("RJLC").
Here are the things I find troubling about Ray Lucia, his relationships and how he advises his listeners:
1) Ray Lucia was a licensed stockbroker and registered representative of First Allied Securities, Inc. (an SEC-registered Broker-Dealer) until June 2010. He is still a licensed insurance agent and part owner (with his son) of LLK Insurance Brokerage Services, LLC.
2) Ray receives referral fees from RJLWM (via RJLC) and is compensated to serve on the Macro Investment Committee along with Ben Stein and several principals from Advanced Equities Asset Management, Inc., which is owned by First Allied Securities. It is not disclosed how much his referral fees are or how much he is compensated in total by RJLWM. It is disclosed on Ray's website that: "Raymond J. Lucia Companies, Inc. is not affiliated with RJL Wealth Management, LLC", which may be technically true as I am sure the word "affiliated" has a very specific legal meaning in this case. However, it is very clear (and disclosed) that the financial ties between Lucia and RJLWM run very deep. It is entirely possible, given the ways that money can flow back to Lucia (referral fees, advisory fees, insurance product commissions, advertising, sponsorship of shows, etc.) that he takes home a very healthy share of the economics of RJLWM. He is not a control person of RJLWM and is not affiliated with it under the SEC-definition, but this sure seems like a technicality to me.
3) RJLWM (as well as RJLC) is an RIA and is, therefore, supposed to adhere to a fiduciary
standard where the adviser has "a duty of utmost good faith to act solely in the best interest of each of its clients. RJL Wealth Management and its associated persons have a fiduciary duty to all clients." (quoted from the RJLWM ADV Part 2 page 20 attached below). However, and I didn't even know that this was possible, RJLWM employees are also registered representatives, or brokers, for First Allied Securities and receive commissions on products sold to their clients. They "wear two hats" so to speak. On the one hand they are supposed to be providing the best possible fiduciary advice and on the other, they are putting their clients into lots of high fee, high commission managed accounts and illiquid investments. The "potential investments" for the longer term "buckets" of their clients as outlined in the ADV Part 2 should make investors and regulators hair stand on end: fee-based managed accounts, mutual funds, exchange traded funds, unit investment trusts, closed-end funds, equity annuities, variable annuities with principal protection riders, variable annuities with death benefit riders, structured products, non-traded real estate investment trusts, alternative investments, and commodities.
While these investments need not be ones with high fees and higher commissions, experience tells me that these are likely not of the "squeaky clean" variety. I do not know how you can be a true fiduciary and capably manage the inherent (and, to RJLWM's credit, fully disclosed) conflicts of interest of also selling commission products like these.
4) The "Buckets of Money" managed accounts that are marketed by RJLWM are sub-advised by a firm called Advanced Equities Asset Management, Inc. ("AEAM"), which is in turn owned by Advanced Equities Financial Corp. ("AEFC"). AEFC is also the owner of First Allied Securities, Inc. Clients have the pleasure of paying up to 1.45 -1.9% per year (for <$250k accounts, and down to 0.-75 - 1.1% per year for $5-10m accounts depending on the strategy) for the management of these various accounts designed to fit into a clients various buckets. This is on top of the underlying ETF and mutual fund fees and 12b-1 fees that will also be levied (RJLWM and AEAM will get the ~25bp 12b-1 fees unless it is ERISA money). It looks like much of RJLWM client assets invested in liquid securities are invested in these "wrap" accounts. AEAM manages about $750m in total.
So, the fees above seem a little heavy, but let's ignore that for a moment. The real story is that RJLWM, as a fiduciary, is pushing its clients into proprietary wrap accounts managed by a small asset manager (the run about $750m in total - I speculate that a large % is from RJLWM clients) that is owned by the broker for which most of RJLWM's advisers also act as registered representatives. But there is more. AEFC received some very unwanted attention from Forbes in 2008 with this article: http://www.forbes.com/forbes/2008/0901/048b.html
. The article describes in detail the activities of AEAM's sister firm, Advanced Equities Financial (AEF), and its business model in the venture capital space. Close readers of this article will not help to see the similarities between this business model and that of many non-traded REITs - provide "little guy" investors access to a "sexy" asset class, charge them high fees and have them buy all the junk that the pros don't want. The leaders of AEFC printed a rebuttal of the article, but it rings a little hollow to me. Here are a couple of other trade people commenting on Advanced Equities:http://www.greentechmedia.com/articles/ ... -equities/http://venturebeat.com/2008/08/21/advan ... -bad-trip/http://www.ripoffreport.com/cross-borde ... -8ey23.htm
These comments seem reasonably credible to me, but obviously one or more may have an axe to grind so beware.
The relationship between AEF, AEFC, AEAM and First Allied is tight - all common control/owners. This firm just doesn't pass the smell test to me if I am working with a client as a fiduciary. How do I decide that these guys are great and that I should have them manage a huge chunk of my client's assets? I would be very surprised indeed if their net of fees performance in these wrap accounts is all that good. If it was I think they would have a lot more assets under management.
5) First Allied Securities, Inc. has been subject of many NASD/FINRA fines and arbitration settlements just like the firm, Securities America, Inc. (owned by Ameriprise, formerly American Express Financial Advisors) with which Ray was registered from 2002-07. You can look up both using FINRA's Broker Check (http://www.finra.org/Investors/ToolsCal ... okerCheck/
) Both have paid out multi-million dollar fines for mis-selling, failing to supervise properly, etc. I know that all reasonably sized broker-dealers will have had issues like this (though these guys seem to have had bigger issues than most "independent" B-Ds), but it just goes to show how misleading it is for the representatives of these firms to market themselves as "financial advisers", implying a standard of care that is well above what they actually have.
I am not saying that Ray Lucia has had anything to do with what First Allied and Securities America's registered reps were up to while he was registered at those firms (he was after all only one of hundreds). I am also not saying that Lucia or RJLWM have advised clients to put money with AEF or that they are connected in some way (although this would not surprise me).
But what I am saying is that it is very troubling that someone is able to run around and solicit lots of small clients (RJLWM has about 3000 with average accounts of about $590k as at Dec 2010) by touting "financial advice" in the way that Lucia does and then to place client money in a bunch of high-fee wrap accounts managed by a firm that at least as some question marks above it as well as a bunch of high-fee, illiquid securities like non-traded REITs and structured notes (don't get me started on these...). I'm sure that all of Ray's marketing material has been appropriately disclaimed and that all his disclosures are perfectly legal. But legality does not make it right to let people believe that you have their interests at heart when in reality you and your associates are horribly conflicted and, ultimately, appear to be far more interested in generating high commissions than in doing the right thing.
Ray piqued my interest due to him being a big fan of non-traded REITs. I wondered how anyone who is a legitimate financial adviser recommend these to people? I got my answer - it is all and always about the fees - follow the money.
An article that highlights some of the positive things Ray (and others, mostly people in the NT REIT industry) say about Non-Traded REITs is here:
Be forewarned, you need a strong stomach to wade through some of this - the journalist who wrote this seems otherwise ok so I am surprised she gave such a pass to so many of the misstatements of fact and misleading statistics highlighted. Clearly a "friendly" piece on the industry.