Hype From A Financial Guru?

Disgruntled clients say Ken Fisher's customized portfolios look very similar

Editor's Note: Since this story first appeared, the Securities & Exchange Commission has ended its inquiry without recommending any enforcement action against Fisher Investments. The NASD's 2004 review of Fisher's affiliated brokerage, Purisima Securities, did not result in disciplinary action. Purisima ceased operations in February, 2005.

On Nov. 17, 2005, the San Diego Superior Court declined with prejudice to certify as a class action investor complaints against Fisher Investments. In January, the plaintiff filed an appeal to that decision. The same court previously declined without prejudice three prior motions to certify the case as a class action.

Kenneth L. Fisher may not be a household name, but that's not for lack of trying. Through Internet marketing, direct mail, and radio advertising, in which he trumpets his two-decade career as a Forbes magazine columnist, the 53-year-old Californian has built his 650-person firm, Fisher Investments Inc., into a major player in one of the fastest-growing segments of the money-management business.

Fisher sells "customized portfolios" directly to the affluent. And he is doing nicely -- to say the least. His firm manages $20 billion in client assets, five times as much as four years ago, for more than 12,000 customers who coughed up a minimum investment of $500,000 (recently raised to $750,000).

Many people flock to Fisher for a reason that he emphasizes in his advertising: his skill in designing customized portfolios that outshine ordinary mutual funds. Indeed, Fisher Investments asserts that it has a superior track record, claiming that clients have beaten the market, often by a wide margin, in 11 of the past 14 years. Such impressive numbers, and an aggressive advertising campaign, have made Fisher the most visible of hundreds of firms clamoring for market share in this booming business.

Fed by a bear market that shook investors' confidence in managing their own investments, "separately managed accounts" distributed through brokerages such as Merrill Lynch & Co. (MER ) and Smith Barney (C ) totaled $498 billion at the end of 2003, a 29% gain from 2002. And the amount is expected to nearly double, to $943 billion, by 2007, says Boston researcher Cerulli Associates Inc.

But troubling questions have been raised concerning Fisher's advertised claims that he custom-tailors investor portfolios. According to various former clients and former employees interviewed by BusinessWeek, Fisher's advertised promises are long on hype and short on delivery. If the claims of overstated advertising are true, Fisher may have overstepped ethical, and even legal, strictures in his quest for client cash.

BusinessWeek has learned that the Securities & Exchange Commission is conducting an inquiry into Fisher Investments, and that several former employees have told the SEC that they believe Fisher's advertised claims are exaggerated. One former Fisher Investment counselor, Dan Laimon, president of San Diego's TriVant Custom Portfolio Group, which he started after leaving Fisher last year, told BusinessWeek: "Almost 99% of the Fisher portfolios are identical in their composition." Laimon says that is "odd" because of "the very wide range of their clients' investment objectives, income requirements, and risk tolerance."

Another probe into Fisher Investments is being conducted by the NASD. The regulator, reacting to a tip, accelerated a previously scheduled review of the firm's affiliated brokerage Purisima Securities. Fisher's lawyer says the NASD discovered no "material problems." But that conclusion may be premature. NASD spokesperson Nancy Condon says: "The exam has not been completed."

AX TO GRIND. Fisher vigorously denies wrongdoing. In an e-mail sent without knowing that Laimon was being interviewed, Fisher contended that his former employee had an ax to grind and was trying to steal business from him -- all of which Laimon denies. Fisher describes as "obviously false and illogical" Laimon's assertion that Fisher's portfolios are almost 99% identical in composition. He dismisses allegations that he does not provide customized portfolios as the work of a single former disgruntled investor and several former employees who he says are biased. "We do exactly what we say we do," he says. Even if clients' portfolios look similar, they have been customized to each individual's objectives and needs, he says. Andrew S. Teufel, director of research at Fisher, draws an analogy with ear, nose, and lung infections that may all be cured by the same antibiotic.

Fisher acknowledges that an SEC inquiry is under way but downplays its significance, pointing out that it is a preliminary procedure and not a formal investigation. "We have never had a regulatory problem with the SEC, and we will not have a regulatory problem with the SEC," he says.

That may indeed be the case. But the allegations surrounding some of Fisher's advertising exemplify the pitfalls investors face when they opt for personalized investment management. For one thing, separate-account managers dwell in a kind of legal twilight zone, in which key concepts, such as "customized portfolio," are not spelled out. Federal legislation, which provides the legal framework of the business, says only that advisers are required to manage accounts on the basis of a client's "financial situation and investment objectives and in accordance with any reasonable restrictions." Generally speaking, advisers are expected to "uphold the highest standards in the securities industry in terms of their culpability and responsibility to the client," says Brian Hamburger, a lawyer and managing director of MarketCounsel, a compliance-consulting firm in Teaneck, N.J.

Consider the word "customized" itself. That often means just slightly tweaking a portfolio. While many advisers allow clients to make some special requests, such as permitting them to restrict purchases of tobacco stocks or to sell stocks to harvest tax losses, usually they are careful not to give the impression that they toil for hours to create a special portfolio. Says Pamela J. Wilson of Boston law firm Hale & Dorr LLP: "Most investment advisers bend over backward not to overstate how personalized their advice will be because they don't want to deal with angry customers down the road."

"BASELESS". One former Fisher client, H. Frank Rogers of San Diego, has filed a class-action complaint, which is pending in California Superior Court, alleging that Fisher's claims of providing "personal or customized portfolio management services and a customized portfolio" are false. According to the suit, clients expect advisers to design customized portfolios that meet their "unique investment needs and objectives." Instead, it claims, Fisher advisers put clients into practically identical investments. Fisher vigorously denies the allegations in the suit, which he describes as "baseless and without any truthful support," and is seeking its dismissal.

Previously, in a separate action, Rogers won about $136,000 in damages in an arbitration proceeding against Fisher Investments. Rogers had claimed in the arbitration that the firm inappropriately put his retirement savings into stocks in May, 2002, months before the stock market rebounded, after Rogers requested a conservative strategy that would protect against drops in excess of 10%.

The arbitrator's summary of evidence presented in the Rogers arbitration appears to support the view that Fisher Investments does not always custom-tailor its portfolios. According to the arbitration decision, Teufel testified that 80% of the firm's individual clients "had been placed...in essentially the same portfolio." But Teufel says he was misquoted in the decision. He says he testified instead that 80% of the firm's clients had a "global orientation," toward the Morgan Stanley Capital International World index. Rogers' lawyer, however, says that the decision quoted Teufel correctly.

Several former employees say they told the SEC that they think Fisher Investments' advertising leads clients to believe their portfolios are tailored to their needs by the top three officers of the firm. Fisher's brochure says each client's investment counselor will communicate "your needs to Ken, the rest of the investment policy committee, and our securities traders." Former employees told BusinessWeek the firm provides only a minimal degree of customization and many clients are actually put into similar investments by lower-ranking advisers and not the "committee." They, and some former clients, contend the firm provides boilerplate portfolios rather than the individually tailored portfolios advertised on the Web site. The site says the customization takes into account "such things as time horizon, income needs, outside holdings, and tax status." One former Fisher client says he left after he discovered his parents' investments were similar to his even though they are roughly 30 years older.

When asked about allegations concerning his personal involvement in designing portfolios, Fisher initially told BusinessWeek that he doesn't review individual accounts. But he later revised his statement to say there is no "formal process" for him to do so. Teufel says Fisher's investment policy committee eyeballs less than 10% of individual clients' portfolios -- when, for example, unusual securities or complicated tax issues are involved. Most are designed by investment counselors based on guidelines set by the committee. Fisher says the vast majority of his customers are satisfied with his methods and receive more personalized service than is offered by most separate-account managers.

PRESCIENT CALLS. Fisher notes that his firm has faced only five legal actions in its 17-year history, including Rogers' arbitration and lawsuit. And friends point out that Fisher has made some prescient market calls -- such as warning his clients that the technology bubble was about to burst shortly before the NASDAQ peaked in March, 2000. For some clients, such things are all that matters. "I had no interest in a customized portfolio," says San Mateo (Calif.) client Vincent G. Boston. "I wanted someone to maximize my return."

Fisher says he's on a mission to force the money-management industry to put an end to a vast array of hidden conflicts of interest, such as abusive fee structures, by going directly to clients. Indeed, if the questions swirling around how Fisher customizes portfolios are any indication, this corner of the money management industry has some serious issues. They need to be resolved -- and fast.

By Emily Thornton in San Mateo, Calif.

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