If It Sounds Too Good to Be True, It Almost Always Is

The Most Powerful Question You Can Ask a Financial Advisor

I’ve been saying it for decades: the best investments we ever made at Markowski Investments were often the ones we walked away from. When someone can’t explain to you in plain English how their strategy works, that’s not a knowledge gap on your part. That’s a red flag.

There’s a scene in the movie Big where Tom Hanks, playing a kid stuck in a grown man’s body, raises his hand in a corporate boardroom and simply asks, “I don’t get it. How is this fun?” Everyone in the room acts like he’s the problem. He wasn’t. He was the only honest person in the room. I channel that kid constantly in my work. When a financial engineer pitches me some complex, layered, magical strategy, my first move is to raise my hand and say, I don’t get it.

More often than not, that question exposes everything.

Structured Notes and Promises of 15% Bond Returns

Let me give you a real example that’s blowing up right now. Stifel Nicholas is facing another $30 million customer complaint tied to one of their star brokers, Chuck Roberts, and his structured notes strategy. I was pitched on presenting these things to our clients for years. I looked at them carefully and kept coming back to the same feeling: something is off here.

And I was right.

Here’s what Roberts was telling his clients:

• Structured notes were essentially a substitute for bonds
• But not regular bonds. Bonds paying 15% returns
• Long-term average of 12.25% with little to no risk
• Presented as though market gravity simply didn’t apply

Let me be direct with you. When someone tells you there is no risk involved in an investment, that is your cue to start walking toward the exit. That is not a feature of the product. That is a warning siren.

The IRS Is Coming for “Tax Alpha” Strategies

Here’s another one I flagged a while back. AQR’s Delphi Plus, one of the largest hedge funds in the world, has been running what they called a tax alpha strategy. The pitch was sophisticated tax optimization, a loophole that let high-net-worth clients defer or reduce their tax burden in ways that looked legal on the surface.

I called it what it was: tax evasion dressed up in a nice suit.

Now the IRS and the Treasury Department are moving in, and the language in their guidance suggests any enforcement action could be retroactive. That means people who thought they were being clever are going to be writing some very uncomfortable checks.

Key takeaways from this situation:

• “Tax avoidance” and “tax evasion” are not the same thing, but some advisors blur that line deliberately
• If a strategy’s primary feature is hiding money from the government, the government eventually notices
• Retroactive enforcement means the savings you thought you locked in may evaporate entirely, plus penalties

The Alan Stanford Lesson We Keep Forgetting

Remember Alan Stanford and his certificates of deposit from the Bank of Antigua paying 12.5%? People handed this man billions of dollars because the word “CD” felt safe. CDs are boring. CDs are conservative. CDs don’t commit massive fraud.

Except this one did.

The product name means nothing. The regulatory wrapper means nothing. What matters is asking the simple question: how is this possible? How is a CD from a bank in Antigua paying 12.5% when every other CD in the country is paying a fraction of that? If you can’t get a straight answer, that’s your answer.

How to Protect Yourself

Here is the framework I use, and it’s not complicated:

• If you don’t understand it, don’t buy it. Not “don’t understand it yet.” If after a full explanation it still doesn’t make sense, walk away.
• “No risk” is a fiction. Every investment carries risk. Anyone who tells you otherwise is either ignorant or dishonest. Neither is acceptable.
• Extraordinary returns require extraordinary scrutiny. 12%, 15%, guaranteed. These numbers should trigger alarm, not excitement.
• Big words in the wrong order are a tell. When the explanation relies on jargon stacked on top of jargon and the whole thing sounds impressive but means nothing, they are hiding something.

The financial engineers on Wall Street are creative. I will give them that. But creative is not the same as legitimate, and impressive is not the same as sound. The best thing I ever did for the people I work with was learn to say, I don’t get it, and mean it as a full stop, not an invitation to be talked into something.