Though most investors believe brokers put investors’ interests above all else, that’s not always true.
“There isn’t a single statute that makes a broker a fiduciary,” says Hugh Berkson, a principal at McCarthy, Lebit, Crystal & Liffman Co., LPA.
“Investors don’t understand that and are surprised to find that when something goes wrong thanks to bad or conflicted investment advice, brokers will claim that they are just a salesperson.”
Smart Business spoke with Berkson about the signs that suggest investment brokers are working more for themselves than they are for their clients.
What is it that investors don’t understand about their brokers?
No single statute requires brokers to disclose a conflict of interest, so brokers may put their own or their firm’s interests ahead of their clients’ interests. Investment advisers, on the other hand, operate under a statute that establishes them as fiduciaries. They, therefore, maintain an unquestioned legal obligation to act in their clients’ best interests.
Investors might not be able to tell a broker apart from an investment adviser by title alone. Many brokers try to blur the distinction by using titles like ‘financial adviser,’ but those titles are of no legal import. A savvy investor will ask: ‘Are you a broker, or a registered investment adviser?’
Investors can check any brokers’ background to see whether other investors or regulators have found fault with their conduct through BrokerCheck. BrokerCheck reports are maintained by the Financial Industry Regulatory Authority (FINRA), the regulator that oversees the brokerage industry, and are available for free through FINRA’s website.
Why should investors monitor their investments?
Brokers make investment recommendations to clients and typically don’t believe they have an obligation to monitor their clients’ accounts. Brokers who get paid a management fee (usually a percentage of assets under management) are supposed to keep an eye on the account, but brokers who are paid a straight commission on each transaction likely won’t. That leaves it up to the client to monitor his or her investments.
Brokers can and do hide misconduct, but often there are signs that something is off. For example, something is likely wrong if investors see transactions they didn’t explicitly authorize, a surprisingly high number of transactions, a concentration of their portfolio in a particular investment or category of investments, or results that contradict what the broker told them to expect.
Brokers cross a legal line when they make a trade without a client’s permission, ask to borrow money from a client, or suggest the client should invest with the broker outside of the firm — a ‘can’t-miss’ real estate deal on the side, for instance.
What should investors do if they’re suspicious of their broker’s actions?
Investors can start by talking with a branch manager to try to get the issue resolved, though it’s not certain that the manager will reach a solution the investor finds adequate. When that’s the case, investors would do well to seek legal counsel to determine what, if anything, should be done.
Most attorneys will offer a free consultation to listen to investors’ complaints and give them a sense of whether it’s something that should be pursued.
FINRA maintains a dispute resolution forum — arbitration — to resolve disputes between investors and their brokers. While investors are free to represent themselves in arbitration, they will be at a significant disadvantage when faced with experienced counsel on the other side. Investors can level the playing field by hiring an attorney who understands both the law underlying investor claims, as well as the unique nature of a FINRA arbitration.
For investors with particularly small claims — less than $5,000 — there are law school securities clinics that offer to help investors reach a resolution.
The vast majority of brokers want to do the right thing by their clients and try to add value to the process. Very few brokers violate the industry’s rules and standards. In the unfortunate circumstance that a bad broker violated the rules and caused losses, investors would do well to get help to try to recover their damages. ●
Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman Co., LPA