If you’ve been watching the news lately, you may have caught a pretty major story unfolding about how federal regulators are cracking down on brokers and broker-dealers that greedily exploit or manipulate senior citizens. We are all appalled that such predatory behavior is going on at such a mass scale, against one of the more vulnerable segments of our population. According to one government report, fee-gouging and other forms of broker misconduct cost older American investors billions and billions of dollars every year in retirement savings.
But are older investors the only ones getting the screws put to them?
Sadly, of course they’re not.
Conflicts of Interest: Brokers vs Investors
While we are properly most outraged to discover our elderly citizens being manipulated by the financial advisors and investment managers they trust and rely upon, we should not forget that the brokerage industry has never put the interests of its clients - old, young, or in-between - above its own. Never. This is true in spite of the fact that there are many federal laws stipulating that broker-dealers have a so-called fiduciary duty to put their clients’ best interests first; and in spite of the fact that the brokerage industry’s marketing to investors relies heavily if not almost exclusively on cultivating the perception that it holds its fiduciary duty to customers as sacred, inviolable, precious.
Fiduciary Duty Has Two Faces in the Brokerage Industry
According to another deeply unsettling recent report, this time by the Public Investors Arbitration Bar Association (PIABA), this perception - or let’s be honest and call it an illusion - also costs investors billions of dollars every year. It seems American investors are losing billions every which way.
The truth is, brokerage firms are only willing to acknowledge a fiduciary duty to investors when they’re trying to induce them to hire their services. But then, if there’s ever a dispute, and the investor feels the broker-dealer didn’t do their job, the brokerage will turn around and say, “We don’t owe you an fiduciary duty. Look at our handbook. Look at our agreement. We’re order takers. You signed off on these investments. It’s your risk. Sorry, pal, that’s the breaks.”
They should try running an ad that says things like that, honest things - see how many customers rush to sign up at that brokerage firm!
In all seriousness, however, the misleading advertising prevalent among brokerage firms lulls investors into a false sense of security over their investments. They stop checking up on their accounts and their broker because they trust him or her; they’ve been told that is, along with access to information and expertise, the main reason to invest with him or her. Trust. You can trust us. We know you, etc etc. Unfortunately, succumbing to that false sense of trust means investors may catch unsuitable investment or even gross negligence or misconduct too late - when their money’s already gone.
Practice Good Financial Self-Defense
There is some ray of hope in this dark cloud. Again, regulators are currently trying to more clearly define the fiduciary duty owed to customers by broker-dealers with the intent of holding them to this obligation. Fingers crossed, anyway. Meanwhile, it’s important to remember that regulators wouldn’t find this process so difficult if broker-dealers naturally felt they owed you an honorable duty. They don’t. So as an investor you need to act accordingly, and protect yourself.
For some tips from our firm on financial self-defense, please click here.