Fire Your Broker!

Fire your financial adviser, unless they are a fiduciary

By John F. Wasik
Author, The Cul-de-Sac Syndrome

If you have a conventional stock broker or agent acting as a financial adviser working on commission, fire them.

Now that the SEC has endorsed a “uniform fiduciary standard of conduct” for brokers and investment advisers, there’s no reason to settle for anything less. This is a financial professional who, by law, must put your interests first.

In the past, the SEC did little to protect you from the ravages of a commission-driven world. Few knew the difference between a “financial consultant” (a broker) or a “certified financial planner” or “registered investment adviser.” The latter two are fiduciaries.

Having a fiduciary is one of the best investor protections around. If they wrong you, you can sue them. As a requirement of the Dodd-Frank financial reform law, the SEC needs to write the rules codifying this key investor protection and Congress needs to rubber stamp it.

It’s also time to move on to fix the broken system that deals with investor disputes. With brokers and agents, you typically sign away your right to sue. You are then subject to inadequate “suitability” standards that don’t offer much protection at all. Not only is it extremely difficult to sue, you are forced to settle most disputes in an industry-run arbitration system.

Countless investors are cowed by the process of proving that they were sold inappropriate investments by brokers. Although the industry doesn’t release the numbers — they should — most investor arbitration lawyers say that about 80 percent of wronged investors settle with brokerage firms for a fraction of what they are owed rather than go through arbitration.

Not surprisingly, investors don’t like the fact that even if they choose the arbitration process — which is billed as a cheaper alternative to litigation — it will cost them thousands in an attempt to get their money back and will face at least one industry member on a three-person arbitration panel. It’s like having a lawyer being the foreman of a jury in a legal malpractice trial.

The securities regulator FINRA is examining alternatives to remove the industry representative and give investors the right to sue in court. We can only hope these become permanent options.

The even bigger scandal is that securities brokers will be still largely self-regulated by an industry organization called FINRA. The group is charged with policing firms, providing background checks on brokers and running its arbitration forum.

How, you wonder, can an industry that powerful and wealthy effectively police itself and more than 600,000 brokers? The bumbling fictional film detective Inspector Clouseau would have been a better regulator in recent years.

FINRA missed the 2008 meltdown, the Madoff scam and failed to prevent more than $150 billion in losses in complex and structured investments that made their way into retail products like mutual funds, according to a soon-to-be published study I conducted for The Nation Institute.

Even if the new SEC rule covers all broker-dealers and advisers, it may not fully cover insurance agents, who sell securities products in the form of troubling variable and equity-indexed annuities. That’s another reason that you shouldn’t rely upon anyone other than a fiduciary for comprehensive financial advice.

In the past, the securities and insurance industries have relied upon more disclosure as an alternative to more protection for investors. Have you read a prospectus for a complex financial product lately? Does it clearly spell out the risks and costs? Most don’t.

Risky investments don’t need more disclosure — they already have plenty of that — they need cigarette-type labels that tell you up front “this investment is hazardous to your wealth.”

The SEC and FINRA still aren’t doing their jobs in an age in which ladders, toy packaging and dry cleaning bags have better warnings. Making most financial professionals fiduciaries is positive development, but you need to take the first step in hiring one now to ensure that your best interests are being served.