Keeping Your Broker Honest


    The SEC has recommended that investment professionals providing personalized advice to retail customers follow a fiduciary standard of care, according to a SEC staff report sent to Congress on January 21.

    The long-awaited staff report recommends that the SEC commissioners write regulations to create a fiduciary standard for broker-dealers, which is about the same as one currently in force for investment advisors.  

    Currently, broker-dealers must only meet a broad suitability standard when suggesting securities that should be purchased by retail investors. But the SEC staff report calls for requiring brokers to act as fiduciaries, which means they would have to put their clients’ best interests ahead of their own.


    Keeping brokers honest

    This may sound esoteric to many retail investors, who may have mistakenly thought this was the case all along.  But for years, brokers have routinely pushed stocks underwritten by their broker-dealers or mutual funds which paid the broker a revenue sharing deal. 

    In these cases, the broker does not provide objective advice to their clients, but puts their personal financial benefit ahead of any purported benefit to their client.  The proposed new fiduciary standard recommends that brokers “act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

    Straight Talk
    Under current practices, brokers have asserted that their conflicts of interest are covered in their disclosure documents.  But studies have repeatedly found “that disclosure is, at best, insufficient for addressing conflicts of interest,” according to Knut A. Rostad, chairman of the  Committee for the Fiduciary Standard.

    “Indeed, there is convincing evidence that disclosures are frequently confusing and misleading for investors, even when made under the best circumstances with the purest of intentions,” Rostad said.  In addition, many investors simply do not read or understand the disclosures that are commonly buried in mutual fund prospectuses and broker agreements, which are drafted by lawyers.

    While this debate has been going on for years among the financial services industry and regulators, it has not attracted the attention of many individual investors.  As a result, brokers have been working under a much less stringent set of ethical standards than financial advisors, who are bound by a fiduciary standard. 

    This has finally become an unworkable situation, according to SEC Chairwoman Mary Schapiro, who said in a speech to the Consumer Federation of America: “I believe that all securities professionals should be subject to the same fiduciary duty — and that all investors receiving advice should rest assured that the advice they get is being given with their interest at heart. But, to be effective, the fiduciary duty needs to be meaningful and uniform across all securities professionals. It cannot be weakened or diluted just so that it can be applied broadly.”

    What Investors Should Do for Themselves
    Regardless of whether the SEC enacts a new fiduciary standard, or if the broker-dealer industry dilutes the regulations, individual investors who want objective advice from their financial professional can take these steps:

    <b>Ask tough questions. It’s your money</b>
    Ask your broker or financial advisors if they are receiving any commission, revenue sharing, trail or other monetary or non-monetary incentives from the fund company or brokerage firm selling the investment?  If so, how much are they receiving?

    <b>Ask what other similar and suitable investments are available?</b>  
    Remember: No investment product today is unique. There are other very similar products available which may be better suited to your needs.

    Ask about revenue sharing and 12b-1 fees
    If you bought mutual funds from a broker, ask if your broker has been receiving revenue sharing or 12b-1 fees from a mutual fund company for any funds you have bought. 

    Ask for a portion of the revenue sharing money
    If your broker is receiving revenue sharing, ask for a portion of this money to be paid to you.  After all, your purchase generated the revenue sharing in the first place, and without it, your broker would never have received any compensation in the first place.  Mutual fund revenue sharing is paid quarterly or semi-annually to the broker-deal and/or the broker who sold you the mutual funds.  If you have owned the mutual funds for years, the revenue sharing payment could go into thousands of dollars.  In Florida, it is permisable for purchasers of insurance policies to get a portion of revenue sharing paid to brokers.  This should also apply to the mutual fund industry, but again, 99.9% of investors do not even know this practice exists, so they cannot even ask for the money.  This is also known as “disclosure” in the mutual funds industry.

    Use a fee-only planner
    If you want greater peace of mind about working with a broker who may have a conflict of interest when it comes to providing objective investment advice, find a fee-only financial planner or a financial planner, who readily has adopted and followed the fiduciary standard.

    Don’t be afraid to fire your broker
    If you ask questions and do not get straight answers, fire your broker.  In today’s volatile, low-return financial market, where lost money may never be recovered, adopt the position: Your investment losses are irreplaceable, especially as you grow older and your savings rate decreases.  And since your broker will never repay you for losses they cause, follow this rule: One strike and you’re out.

    Remain vigilant
    Finally, regardless of which type of financial professional you work with (broker or financial planner), remain vigilant about protecting your own interests and getting the bets, objective advice possible.  Do not rely on the SEC, brokerage firms, mutual fund companies or other large financial institutions to protect your own interests.  Take that responsibility yourself.

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    Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site,, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).


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