Financial Fallout

Bankers and investment advisers are battered, not broken.

When it comes to relationships between financial services firms and their clients, a lot of companies aren’t exactly feeling the love. The latest edition of a major annual report on the global financial services industry says it all: “Clients are feeling bruised and have become disillusioned with their financial institutions.”

International accounting and management advisory firm PricewaterhouseCoopers made that statement in their 2009 Global Private Banking and Wealth Management Survey. The firm’s Web site adds a blunt assessment of the condition of financial businesses: “Financial services organizations are facing the most serious and prolonged crisis since the 1930s.”

Without question, recent times have been rugged for investment advisory firms, banks and others in the financial services industry. A faltering global economy and the collapse of financial markets squeezed personal wealth to the tune of trillions of dollars. The debacle left many people feeling less than well off, and in some cases they blame their financial advisers.

The Financial Industry Regulatory Authority Inc., known as FINRA, reports that investor complaints have risen sharply. As of June 30, 2009, requests for arbitration in disputes between investors and advisers were up 82 percent from the previous year. The most common complaint: breach of fiduciary duty.

“When people’s accounts go down 40 percent to 50 percent, and in some cases worse, it’s a tremendous shock,” says Harry Stansbury, a securities lawyer and former deputy securities commissioner in the Louisiana Office of Financial Institutions.

Stansbury says that, along with arbitration filings, a lot of disgruntled investors have filed lawsuits. “Many are alleging fraud on the part of the people who sold them the investments,” he says.

Kurt Reasonover, of local law firm Reasonover & Olinde LLC, says high-profile fraud trials have aggravated investor attitudes toward advisors. The case of Bernard Madoff, the New York investment company owner who stole billions of investor dollars through a Ponzi-like operation, set a new low in client exploitation. Madoff recently began a 150-year prison sentence.

Some Louisiana residents feel they were similarly gouged by Texas financier R. Allen Stanford, whom the Securities and Exchange Commission has accused of running a Ponzi scheme involving certificates of deposit. Stanford’s company operated an office in Baton Rouge.

Still closer to home, New Orleans residents are among those seeking compensation for losses they suffered as clients of longtime Metairie financial planner Judith Zabalaoui. A federal judge recently sentenced the 71-year-old planner to eight years in prison for stealing more than $5 million from her clients.

“We’re certainly seeing more people coming in with more serious claims than at almost any point in my career,” says Reasonover, who has been handling securities litigation for 20 years.

Despite general strength in the local banking market, problems do exist. Whitney National Bank, the largest financial institution headquartered in the local area, is among those that received assistance through the federal government’s troubled asset relief program last year. The bank, which took hits in its real estate lending portfolio in Florida, accepted $300 million in the federal bailout.

Whitney Chairman and CEO John Hope says the bank faced “an extreme situation” in Florida’s real estate market, where soaring property values led to overbuilding in condominiums and resorts before the bottom fell out last year. He says that Whitney is on the mend.

“While we see some encouraging signs about things happening in real estate markets, the only prudent thing to do now is continue to work through those problems,” Hope says. “I think over the balance of this year we should get most of that taken care of. We have an extremely strong capital base.”

Hope says Whitney has benefited in the last few years from geographic diversity, given that the bank also operates in Texas, Mississippi and Alabama. “Our Texas market is doing quite well, so the balance you get from spreading out is healthy,” he says.

The best hope for restoring buoyancy to the industry is the return of loan demand. Borrowers, particularly commercial borrowers, have largely stayed on the sidelines in the face of economic uncertainty. Briggs, at Chaffe & Associates, says that a few bankers are reporting an uptick in lending. “A lot of it is consumer demand,” he says.

Activity at Gulf Coast Bank & Trust Co. bears him out. CEO Guy Williams says the bank has been doing steady business in mortgage lending. “Much of it is young couples and people moving to New Orleans and wanting to buy houses,” he says.

Williams says the city continues to attract young professionals and others who like the idea of living in New Orleans and contributing to its recovery. The affordability of local home prices combined with low mortgage rates works to these buyers’ advantage. “For the first time in a long time, prices and rates are down at the same time,” he says.

Gulf Coast Bank & Trust has made no sub-prime loans, and has “limited exposure” to riskier commercial and speculative real estate loans, Williams says. “We’re not bulletproof, we’ve been affected, but not as much as some others have been.”

As the state’s leading Small Business Administration-backed lender, Gulf Coast has continued to see loan demand from start-ups, Williams says. “We’re encouraged by the number of younger folks who are starting new businesses.”

The next six to 12 months probably should signal how soon banking activity might return to levels of a few years ago. “The recession appears to be slowly coming to an end,” says Briggs. While he expects that a few troubled institutions in other areas may succumb to the economy and close their doors in coming months, he predicts no New Orleans-area banks will be among them.

The financial crisis that erupted on Wall Street has reverberated through investment and brokerage firms across the country. Investors have seen some of the best-known names in the business knuckle under. Giant Lehman Brothers Holdings, for instance, collapsed into bankruptcy in September 2008.

Recently, even big discount brokerage firm Charles Schwab came under fire as New York attorney general Andrew Cuomo leaned on the company over its marketing of certain securities.

Such pain in big brokerage houses generally reaches into their branch-office locations, such as New Orleans, as well. But sometimes local investment firms fare better.

Steven Rueb, a vice president at New Orleans brokerage firm Dorsey & Co., says the company’s 50-year history in the city has been a stabilizing influence for clients. “We have actually had positive trends in every year since Katrina,” he says.

Rueb says that like most investors, Dorsey’s clients were rattled by events in the financial markets at large. But he says clients are showing their preference for dealing with advisers they know. “What they’re saying is, ‘I want a high degree of trust in the people I’m dealing with, a high degree of expertise, and I want local.’

We certainly have benefited from that.”

Dorsey’s clients are people who agree with the firm’s investment philosophy, Rueb says. Long known as a specialist in bonds, the company considers debt securities the foundation for a strategy that focuses on preserving wealth. “During the [19]90s that was kind of passé, but simple, conservative advice has become very popular in the last few years,” Rueb says.

Cautious investing trends generally follow periods of upheaval, such as that of the last few years. Securities lawyer Reasonover says that often means a return to simpler investing and saving habits.

“Our economy is based on confidence in the capital markets,” he says. “Everyone hates to see a loss of confidence, but I’m sure that’s happened, and a lot of people are going back to investing in CDs.”

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