A Couple Won the Powerball. Investing It Turned Into Tragedy. - WSJ [View all]
In spring 2008, Paul Rosenau, a construction supervisor and heavy-equipment operator in Waseca, Minn., bought a Powerball ticket—and hit a $59.6 million after-tax jackpot. Rosenau, a devout Lutheran and the son of a pastor, recalls with a tremor in his voice how he and his wife, Sue Rosenau, felt when they woke up the next morning.
They realized their granddaughter Makayla had died exactly five years earlier. She had Krabbe disease—a rare neurodegenerative illness that strikes infants and usually kills them in less than four years. Makayla died at the age of two. “We were very sure [the Powerball jackpot] was divine intervention,” Rosenau recalls, “and we were very sure what we were supposed to do with it.”
What they hadn’t counted on, though, was that human intervention can be destructive. What happened next is a heartbreaking tale that shows how powerfully fees and commissions can pervert financial advisers’ judgment and crush their clients’ wealth. It’s also why I think investors should welcome regulations that require advisers, brokers and insurance agents to act in their customers’ best interests. The Rosenaus promptly used $26.4 million of their winnings to fund a nonprofit, now known as the Rosenau Family Research Foundation. Its mission is to seek treatments for, and support the families of, children with Krabbe disease.
Having almost no investment experience themselves, the couple hired John Priebe, a local financial adviser and insurance agent, to manage the family’s and the foundation’s money. Priebe worked for Principal Securities, the brokerage and investment-advisory arm of Principal Financial Group PFG the Des Moines-based retirement, asset-management and insurance giant. He claimed to be putting his new clients’ best interests ahead of his own, but that’s not what the evidence suggests. Last month, an arbitration panel run by the Financial Industry Regulatory Authority instructed Principal Securities to pay $7.3 million in compensatory damages to the Rosenau foundation.
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According to evidence submitted at the arbitration hearings, Priebe started by buying $18.9 million of variable annuities for the foundation, earning an estimated $1.2 million in commissions. Those insurance assets generally have all the market risks of mutual funds—at vastly higher costs. Mutual funds, exchange-traded funds and other types of investments typically don’t carry commissions and charge annual fees that can be 0.1% or less. Instead, the variable annuities picked by Priebe charged the foundation annual fees of up to 2% or more and carried commissions that could exceed 6%.
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