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Hole in the bucket? SEC charges radio host with offering “misleading” financial advice

San Diego based radio investment guy Ray Lucia faces Security and Exchange Commission charges that his seminars left attendees with a “false sense of comfort” about his “Buckets of Money” retirement strategy.

The SEC complaint Order questions whether Lucia’s schemes are properly “backtested,” which the agency defines as “the process of evaluating a strategy, theory, or model by applying it to historical data and calculating how it would have performed had it actually been used in a prior time period.”

Here’s the gist of the government’s complaint:

“According to the SEC’s order instituting administrative proceedings against Lucia and RJL [Raymond J. Lucia Companies Inc.], they held the seminars highlighting their Buckets of Money strategy in an effort to obtain advisory clients who would be charged fees in return for their advisory services. They promoted the seminars on Lucia’s radio show and on Lucia’s personal and company websites.

According to the SEC’s order, a backtest must utilize actual data from the time period in order to get an accurate result. Lucia and RJL have admitted during the SEC’s investigation that the only testing they actually performed were some calculations that Lucia made in the late 1990s – copies of which no longer exist – and two two-page spreadsheets.

According to the SEC’s order, the two cursory spreadsheets that Lucia claims were backtests used a hypothetical 3 percent inflation rate even though this was lower than actual historical rates. Lucia admittedly knew that using the lower hypothetical inflation rate would make the results look more favorable for the Buckets of Money strategy. These alleged backtests also failed to account for the negative effect that the deduction of advisory fees would have had on the backtesting of their investment strategy, and their “backtesting” did not even allocate in the manner called for by Lucia’s Buckets of Money strategy. The slideshow presentation that Lucia and RJL used during the seminars failed to disclose the flaws in their alleged backtests and was materially misleading.

According to the SEC’s order, Lucia and RJL also failed to maintain adequate records of the backtesting as they were required to do under an SEC rule. The pair of two-page spreadsheets was the only documentation of their backtesting calculations, and those spreadsheets failed to duplicate their advertised investment strategy.”

Lucia wrote a book in 2004 titled Buckets of Money: How to Retire in Comfort and Safety. These days the plan is just called the “bucket strategy,” and is summarized on his website: “You organize your investments into three main groupings, or ‘buckets’ and take the majority of the risk in Bucket No. 3, largely with stocks and real estate. You live by spending down the first two, relatively “safe” buckets; meanwhile, you don’t touch that third bucket.”

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