Stockbrokers. Fiduciary or not? (Northside Sun, June 25, 2015)

BY Investment Fraud Attorney
June 25, 2015

Stockbrokers. Fiduciary or not?  Northside Sun Editorial by Kim Breese, June 25, 2015

A MAJOR COMPONENT of my law practice is representing clients who have lost money in their brokerage accounts. Sometimes the losses are because of outright fraud or gross negligence by the stockbroker. Almost always, the losses occur because the broker did not put my client’s interest ahead of his own and that of his or her firm. If the broker were a fiduciary, like a doctor or lawyer, he would always be required to put his client’s interest first and foremost.

A few weeks ago, the Public Investors Arbitration Bar Association (PIABA), an organization of which I am a member, issued a press release calling on brokerage firms to stop misleading the investing public by portraying themselves as fiduciaries. The PIABA report points out that many brokerage firms portray in their advertisements that they put their clients’ interests first, but when they have to defend themselves in arbitrations against these clients, they argue that no such standard applies. (Almost all investor claims against brokerage firms and stockbrokers are required to be arbitrated under rules of the Financial Industry Regulatory Authority, or FINRA.)

If you believe your stockbroker has a fiduciary duty to you and is required to put your interest first, you would be among the majority of Americans who also think so. But currently, stockbrokers and brokerage firms have no such duty in non-discretionary brokerage accounts. (To avoid confusion, I point out that registered investment advisors, who are paid flat fees rather than commissions, already have a fiduciary duty.) You would never know there is no such duty, however, if you pay attention to brokerage firm advertising. Watch any such firm’s TV ad or read any magazine or newspaper ad and you’ll hear or see language designed to convince you that if you do business with the firm, your interests will always be primary when it comes to your investments.

Typical wording from the ad of a major brokerage firm: “Once you’ve identified your dreams and goals, and you and the advisor have decided to work together; you can count on sound recommendations that address your goals. You’ll be able to clearly see and discuss how the actions and decisions you make today will affect your tomorrow. You can expect to hear about the options you have and any underlying factors to consider. Our advisors are ethically obligated to act with your best interests at heart.”

And this: “It’s time for a financial strategy that puts your needs and priorities front and center”

Unfortunately, some brokers and firms do not always live up to the standards they tout in their advertising. While most brokers I know, many whom I have represented, are honest and ethical and always look out for their clients’ best interests, there too often are other brokers who give you recommendations that enrich themselves at your expense. (To avoid any accusations of hypocrisy, I readily admit there are some members of my own profession about whom I could make the same observation.)

UNLESS YOU HAVE given your broker discretion to trade in your account, he or she, under current industry standards, is required only to make “suitable recommendations,” not recommendations that are best for you. For example, I often see in my practice a case where a broker recommends that a client purchase some type of annuity. While the annuity may be one of many investment products that are “suitable,” the annuity is often not in the client’s best interest. The client is usually better off in some other investment that costs less, does not lock in his assets for long periods of time, does not charge extensive “surrender penalties” and is less risky. But the broker does not recommend these other suitable investments because the commission he receives from them would be substantially less than he is paid for selling you the annuity. (His commission on blue chip stocks or corporate bonds or mutual funds might be one percent or less, whereas the commission paid on the annuity can be five percent, 10 percent or even higher). If the broker were operating under a fiduciary standard, he or she would be required to recommend the option that’s best for you, not just one that’s suitable.

If you lose money, or make substantially less than you should have because of the broker’s recommendations, and you file a claim with FINRA to try to recover your losses, the broker’s and the firm’s defense will be that the annuity was “not unsuitable” and they had no fiduciary duty to recommend other investments. If you reread the firm’s advertisements, you will see the glaring disconnect between (1) how the firm holds itself out to the public and (2) the legal arguments the firm makes in arbitration. One observer called this “advertising like doctors, arbitrating like used car salesman.”

This all may change soon. The Dodd-Frank Act of 2010 requires the Securities and Exchange Commission to study the need for a uniform fiduciary standard covering stockbrokers when providing financial advice. It is highly likely the SEC, pursuant to this study, will create a fiduciary standard for individual investors. In addition, just this past week, the U.S. Department of Labor proposed new rules that would define brokers as fiduciaries if they give advice regarding retirement

If these new standards go into effect, a broker will no longer be able to hide behind the “suitability” rule. He will be required to recommend whatever investment is in your best interest, not his. And the broker and firm will no longer be able to argue in arbitration that they do not have to put your interest first. The individual investor will thus be better protected and better able to recover assets lost through a broker’s improper conduct.