Unsuitable Recommendations

We asked Debra Hayes, managing partner of The Hayes Law Firm which focuses on securities arbitration to explain the differences. “Broker misconduct can range from a broker, stealing your money—which, frankly, there are so many securities and so much regulation that that really doesn’t happen very often these days—to a broker making an unsuitable recommendation to you. For instance, a broker recommends that a person over the age of 55 buy a variable annuity. That’s an unsuitable product; there are huge surrender charges if you ever try to get out of it. You’re paying for the most expensive life insurance which is wrapped into the variable annuity that you could ever pay. That’s an unsuitable recommendation; that’s broker misconduct.”

Unreasonable Assumptions, Risk and Fraud

A broker who runs a hypothetical illustration, and makes assumptions in that hypothetical illustration that are not reasonable, showing that your retirement monies are going to last you throughout your life – that’s broker misconduct. Putting an IRA account inside a variable annuity, that’s broker misconduct. In addition, broker misconduct would be filling out forms in a fraudulent manner or saying that a retiree who’s most concerned about income is an aggressive growth investor. Broker misconduct comes in many, many forms. Unfortunately, clients don’t know about it until they lose money as a result.

Individual Brokers and Brokerage Houses

Brokers work alone and for brokerage houses, but can a consumer bring a claim against either? Hayes explained, “It varies. Many times the individual broker is the one making decisions. However, what he does, the action he takes, is supposedly and allegedly supervised by the branch manager in those offices. Many times, our claims involve failure of the branch managers to supervise what’s going on.

Sometimes, these branch managers and compliance managers get reports on their desk called “exception reports” that are telling them, ‘Mr. Smith is over here losing 50% or 60% of his money” and yet no action is taken by anyone at the brokerage firm. So, obviously there are supervisory and compliance issues that are not being followed by these firms.”

Making a Market: When a Brokerage Firm Uses You to Make Money

You’ve known your broker for years and trust him. He would never have you invest in something that is questionable in order to grease his own pockets. Or would he? Hayes says that consumers have to be careful. “There is misconduct by the actual brokerage firm – something that we call making a market in a stock. In other words, the financing part of Merrill Lynch is financing this stock and earning money. So, they’re promoting this stock, they’re encouraging their brokers to sell this stock to their clients so that they make money on it in every way that they can. Not because it’s necessarily a good stock, not because it’s a suitable security or stock for that client, but because they can make money on every side of the deal. So sometimes the misconduct is at a higher level.

Kickbacks

There are other instances. Edward Jones is in the middle of a class action settlement for taking kickbacks from mutual funds. When you walked into Edward Jones, there were a limited number of mutual funds offered and every single client I’ve ever had has the same mutual funds. Well, that’s because Edward Jones was getting kickbacks on them.

So, sometimes it’s at the high level where the brokerage firm is putting a ‘daily special list’ out there to the brokers and saying, ‘Here’s what’s on the daily special list; sell it to your clients.’ Sometimes it’s at the mid management level where the supervisor isn’t doing his or her job. Other times, it’s at the individual broker level where they’re not acting in the best interest of the client, which is what they are ordered to do by the securities regulations.”

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