This article was originally published by Inside Information. Advisor On My Side obtained permission from the author/publisher, Bob Veres, to republish the article here.
Synopsis: When brokers line their pockets at the expense of their customers, fiduciary advisors often have to clean up the mess they left behind.
Takeaways: Would you recommend zero coupon structured CDs maturing in 25 years to an 80-year-old retiree who needs immediate income?
Every year, starting last year around this time, this publication (Inside Information) attempts to probe the regulatory topic du jour—the suitability standard vs. the fiduciary standard. We do it from an angle that I don’t think can be explored effectively by most policymakers and regulators, who tend to get their information from lobbyists, and are insulated from the most important facts regarding:
A) the difference between suitable and fiduciary recommendations out there in the real world, and
B) the collateral damage that is being inflicted on American investors by sales agents in advisor clothing.
The methodology is simple but not easy. I (Bob Veres) ask the Inside Information community to tell me if they’ve ever encountered situations where a new client came to them after having received advice from a broker sales representative who has given “suitable” advice. If they have, was any of the advice their clients received under a suitability standard materially harmful to their financial well-being?
In almost all cases, the “suitable” advice will have been legal; and that’s the core of the issue. The question I’m asking is: was it also harmful?
Of course, as always, I received a lot of responses, which begs the question: if these cases of broker abuse are so common, why don’t we hear more about them? For one thing, it seems that many brokerage customers who discover that they’ve been taking harmful advice—often for years—are embarrassed and don’t want their naive acceptance to be exposed publicly. That also explains why so many clients have apparently declined to pursue what might have been available remedies or enforcement action against the offending parties.
As one simple example, Dave O’Brien, of Evolution Advisers in Midlothian, VA, tells the story of a dentist and his wife who have a net worth of $3.5 million, annual income around $600,000, no real debt, who were sold two variable annuities inside their IRAs. The broker with Raymond James had them make non-deductible contributions to them.
“I pointed out that this had numerous problems, including turning savings that would have received capital gains treatment into regular income tax, plus added costs, duplicating the already tax-deferred nature of the IRAs and more,” says O’Brien.
Another couple who came to see O’Brien had a net worth of roughly $4 million—including two broker-sold equity-indexed annuities in their IRAs, with ten-year surrender charges. “The rep had also sold them a wrap portfolio which was tax-inefficient, and he was making 1% on that,” he says.
The result in both cases? No action. The first couple declined to pursue any remedies. After further discussing the situation with their broker, the second couple came back to O’Brien and insisted that their annuity was actually earning 6% a year and charging no fees.
“When people find out they’ve been taken advantage of, they do a bit of an ostrich,” O’Brien explains. “What smart person wants to accept that they’ve been duped in such a major way? It’s easier to become cynical and group us all together,” deciding that every advisor is a crook, and that the fiduciary advisor is just trying to make the broker look bad in order to win new business.
But hard on the heels of that reason these stories seldom become visible to the regulators is another one: advisors who run across these damaged client situations fear that the large brokerage firms, with unlimited legal budgets, will harass them out of business if they tell their stories. Many of the stories I was sent came with the caveat that I not share the advisor’s name or the names of the clients. Off-the-record stories, of course, are little more than hearsay to regulators and elected representatives.
And, of course, there’s a third reason. Many of these cases are settled out of court, and the part of the agreement that the brokerage attorneys are most strict and insistent on is confidentiality. That means that many of the most awful stories are quietly paid off, sealed and never become available on the public record.
But… If the clients received compensation, then there’s no harm, right? The stories I’ve been told—confidentially, of course—is that the clients received pennies on the dollar, and were told that if they demanded more, the brokerage firm would string out the process to infinity. In some cases, the brokerage firm never actually paid up once they had the settlement agreement (with the confidentiality clause) signed.
Perhaps the most distracting part of this effort is that many of the stories I received last year, and this year, didn’t involve wirehouse brokers at all. Advisors shared many tales involving insurance agents who sold appallingly inappropriate variable annuity and life insurance contracts, with long surrender charges, to elderly clients or clients who needed immediate liquidity to pay their living expenses. I may need to write a separate article about the insurance industry, and wonder aloud why nobody is calling for insurance agents calling themselves advisors to be held to a fiduciary standard.
Finally, some advisors who have seen these horror stories over multiple decades think there may be a trend toward more caution when brokers are taking advantage of suitability and the opportunity to feather their own nests at the expense of the client. The debates over a fiduciary standard, and the attention it has received in regulatory circles, means that the brokers have to be more cautious.
“With forty years of practice, we have seen innumerable bad recommendations,” says David Demming, of Demming Financial in Aurora, OH. “But,” he adds, “they appear to be diminishing in terms of their blatantness. Now they are becoming more subtle, where we’re seeing the hidden costs of annuities with 2-3% annual management fees and endless redemption charges.” Other excesses: recommending index funds with 1.5-2.5% expense ratios when exactly similar products are charging in the 0.10% range. “Suitability,” Demming adds, “should not be watered down to subordinate the client’s interests to their IQ or detective abilities.”
Some of the anonymous stories, where advisors asked me not to include their names or the names of their clients, were among the most hair-raising. Like the advisor whose mother-in-law had for years been working with a broker she “loved,” who went to her church. The advisor eventually discovered that this pious broker had been churning annuities in her 403(b) account, forcing her to pay surrender penalties in the 8-10% range every couple of years as he incurred new commissions on new sales. “The new annuities didn’t have better income riders or any other benefits,” the advisor says, “and the one he was recommending for the latest swap had lower benefits and higher fees—and a longer surrender schedule.”
The rest of the story offers some insight into why these stories don’t always come to light. The mother-in-law actually resisted her son-in-law’s analysis. “She liked the broker because he was nice, and he went to her church,” he says, “so she felt like he couldn’t possibly be recommending these things for any other reason other than it was the best thing for her.” It took a few conversations about the details of the swaps before she understood the gravity of the situation.
Other stories are still being played out. I heard from several advisors who discovered that their new clients had been sold variable-universal or universal life policies some years ago with illustrations that showed that their premiums would vanish after ten years. Surprise! They didn’t—and the broker who provided a policy illustration with unrealistic assumptions is long gone.
In one case, the client doesn’t have the $40,000 per year that would be necessary to resuscitate the contract, and the new advisor is having trouble getting in-force illustrations from the carrier. All the previously-paid premiums are likely to wash down a very deep drain.
There were stories of extraordinarily high markups on small bond lots that are virtually illiquid, and in one case a client was so undiversified that the advisor could only find a single (large) bond position in her investment portfolio—and the bond defaulted not long after the mortgage crisis.
Other stories involved a portfolio of A share mutual funds that were all just below the breakpoints where the commissions would have been reduced. “And when the rep needs to generate more revenue,” says Shannon Wooley, an advisor in Twin Falls, ID who has seen a number of these cases, “they start calling all their clients with the newest gimmick, and offer that same solution to multiple clients.” Ka Ching! A new round of commissions on the same portfolio.
Finally, there were stories of people giving advice who are evading all standards altogether. Kris Beaulieu, of Clarity Financial Group in Fort Worth, TX has encountered ex-clients of an “advisor” named Bob Guess, who had a radio show in the Dallas/Ft. Worth area, and (since he had lost his securities licenses due to fraud charges) was steering his listeners to a family member’s RIA. The RIA was selling packaged car loans as a way to get 8-10% returns with “little or no risk.”
Mr. Guess was eventually arrested and his assets were seized, forcing one of Beaulieu’s clients to file a claim with the courts. “As far as I know, she has not received any of the last 20% she had invested,” she reports. “What baffles me is that the guy was able to have a radio show talking about money even after he had lost his securities licenses,” she adds. “Why wasn’t FINRA or the SEC or the state able to shut him down?”
Another radio show in Beaulieu’s market is hosted by William Neil “Doc” Gallagher, who was fined $25,000 by the Texas State Securities Board after he provided its investigators with “re-created” customer check receipts, and, later, the state found inadequate record-keeping and misleading correspondence. The Money Doctor (as he calls himself) no longer has a securities license, but is licensed to sell annuities. His website contains a number of testimonials [“Long time client of this financial group very Godly people and trustworthy thank you for that (sic) that you do.”], and the website banner says “Let us help you create a retirement income you’ll never outlive!”
But let’s skip to the main event. Among the stories from advisors who were willing to go on the record, one might come to the conclusion that holding brokers to anything less than a fiduciary standard can have real (and awful) financial consequences for their customers.
One example of elder abuse comes from Kelly Olczak, a wealth manager and managing partner with LynnLeigh & Co., in Pittsford, NY. She began working with an 80-year-old woman whose husband was in the advanced stages of dementia. “Her Morgan Stanley broker decided to put her into 12 annuities,” says Olczak, “which represented three-quarters of her investable assets. It took me almost 8 years to unwind these products, many of which were 1035-ed into a more tax efficient lower cost product,” she adds.
It gets worse. “This woman, who is now a widow, has an ENORMOUS tax bill because all of the annuities are paying out,” says Olczak. “This situation could have been so much better for this family if the advisor had been a fiduciary.”
Louis Day, managing director of NS Capital in Stamford, CT, shares with us a portfolio evaluation of a client who walked into his offices in 2016, after having previously received advice from a Citigroup broker—and the investments that had been recommended under a suitability standard were somewhat different from what Day typically presents to his clients. Roughly $950,000 of the client’s IRA money had been invested in two SunAmerica funds inside an annuity: SunAmerica Dynamic Allocation Portfolio ($449,081) and the SunAmerica Dynamic Strategy Portfolio ($448,339). They were, Day says, invested in proprietary class 3 shares, which, according to an online prospectus, assess a 25 basis point annual 12(b)-1 fee each year and carry a 1.03% annual expense ratio—on top, of course, of the annuity costs. (If the broker had recommended class 1 shares, the client wouldn’t have had to pay the 12(b)-1 fees, and the expense ratio would have been 0.78% a year.)
Burdened by a total of 3.4% annual fees and the 8% up-front commission to the broker, these portfolios returned 5.54% and 5.81% annualized from the initial investment in January 2012 through the end of 2015—compared with 9.43% and 9.55% for a blended index portfolio using similar asset allocations.
The client’s other IRA monies had been invested in Baron Growth Fund ($383,956), the Voya Large Cap Value fund ($352,788) and BlackRock Global Allocation fund ($330,144), which Day was able to show had underperformed comparable index fund mixes, and seemed to be managed as closet index funds. There was an allocation to the Transamerica Multi-Managed Balanced Fund Ticker, whose C shares were paying a 12(b)-1 fee of 1% a year on top of an expense ratio of 1.84% a year. Some of the client’s other monies were put into a managed account with a 1.25% wrap fee, which was holding various bonds with undisclosed markups and commissions.
To make matters worse, the annuity actually represents an example of churning. The broker had replaced a previous annuity with a new one at the full commission rate, with a new 7-year trail lockup and lower guaranteed payment rider. Gross commission to the broker on that inessential transaction: $150,600.
When brokerage firms claim that their reps don’t only recommend proprietary funds or funds that pay for shelf space, you might turn to their own documentation for a dissenting opinion. The prospectus for at least one of the funds that the broker had sold to this client disclosed that Citigroup Global Markets, Inc. (CGMI) received a mutual fund support fee (revenue sharing payment), and undisclosed sales charges for the outside funds that were recommended by its brokers.
Separately disclosed: “CGMI receives expense reimbursement from funds, their affiliates or other service providers for various sales meetings, seminars, training programs and conferences held in the normal course of business. Such reimbursements may be viewed as a form of revenue sharing.”
But is there any real damage caused by these recommendations? What is the financial cost of these “suitable” recommendations?
Reading deep into the prospectus for one of the annuities, Day was able to find the following language:
Selling firms may receive commissions of up to 9.0% of premium payments. In addition, selling firms may receive ongoing annual compensation of up to 1.25% of all, or a portion, of values of Contracts sold through the firm. Commissions and annual compensation, when combined, could exceed 9.0% of total premium payments.
In addition to the direct cash compensation for sales of Contracts described above, Directed Services LLC may (will) also pay selling firms additional compensation or reimbursement of expenses for their efforts in selling the Contracts to you and other customers.
These amounts may (will) include:
- Marketing/distribution allowances;
- Loans or advances of commissions;
- Education and training allowances;
- Sponsorship payments or reimbursements for broker/dealers to use in sales contests;
- Certain overrides and other benefits that may include cash compensation based on the amount of earned commissions;
And additional cash or noncash compensation and reimbursements permissible under existing law.
We may (will) pay commissions, dealer concessions, wholesaling fees, overrides, bonuses, other allowances and benefits and the costs of all other incentives or training programs from our resources, which include the fees and charges imposed under the Contract.
It is important for you to know that the payment of sales-based compensation to a selling firm or registered representative may (will) provide that registered representative a financial incentive to promote our contracts over those of another company.
This is important and even shocking information, and yet I would bet that your eyes started to wander before you reached the end of the disclosure. This is why consumer organizations and advisors argue that disclosures don’t work to protect consumers. Because A) they don’t understand how these provisions impact their bottom line, and B) the real issues are buried in the length of the text. If they knew exactly what these disclosures mean, would anybody prefer to buy one of these investments over, say, an inexpensive ETF? Yet in an arbitration hearing, the company can point to these paragraphs in the prospectus and say that all conflicts were right there and available for the consumer to know about.
Day says that this client’s situation is not uncommon among the broker-advised consumers that he’s worked with. His analysis, he says, “generally reveals that there are a multitude of accounts that are uncoordinated, allocations that have active management closet indexers that should be indexed, allocations that are significantly overweighed to large cap stocks, and individual bonds that are small lots marked up out of inventory which makes them expensive and liquidity-challenged.”
Suitable offering expenses?
Russ Thornton, of Wealthcare for Women in Atlanta, was a Merrill Lynch broker for 12 years. Now that he’s a fiduciary RIA, he routinely sees what he describes as “ridiculously complex and expensive investments” in the portfolios of clients he’s inherited from brokerage advice.
“I’ve yet to encounter a situation where a client has gone to their broker or advisor and asked for an expensive, complex product,” he says. “This garbage is most often sold to people.”
Such as? Thornton cites the case of a 70-year-old widow whose deceased husband had been sold shares in the FS Investments Energy and Power Fund, whose prospectus listed a sales load of 10% plus “offering expenses” of 1.5%, plus a base management fee, incentive fees, interest payments on borrowed funds and “other expenses” amounting to 6.41% a year. The prospectus also noted that there was no liquid market for the shares, so the client had no way to get her money back.
The woman came to Thornton after having tried to get in touch with the dually-registered broker to find out more about the “investment” he had sold to her husband. “He’s been almost impossible for her to reach,” says Thornton. “He’s stood her up for more than one scheduled appointment. Instead, she gets sporadic updates and answers to her questions from his assistant.
Thornton adds that the woman also discovered two expensive variable annuity contracts inside her inherited IRAs.
Suitable BrokerCheck disclosures?
Sometimes the impact of self-serving suitability advice on a client’s finances is significant, but the damage is spread out across so many accounts that the consumers never know what hit them. When Walt Ziffer, of KPRG Advisors in Gaithersburg, MD, met with an elderly client couple in January of 2013, the first thing he noticed was that their joint taxable account had a lot of trades in December, and there were $125,893.03 in realized capital gains for the year as a result. Meanwhile the accounts had $124,453 in unrealized capital losses, so this was not a tax-loss harvesting event.
“I realized that their UBS representative was making a lot of trades and generating commissions for no other reason than to meet some year-end quotas,” says Ziffer. “The clients had no idea what was going on.”
Ziffer asked the couple about their goals. They wanted to minimize estate transfer taxes, reduce their income taxes, simplify their financial lives and have the various portfolios—$1.1 million in a joint taxable account, $500,000 in traditional IRA assets and $250,000 in Roth IRAs—generate enough income for them to meet their living expenses.
How was the UBS broker helping them achieve these goals? He had set up six separate IRA accounts for the husband and wife, and three Roth IRA accounts. These, plus the taxable account, were populated by 53 different mutual funds, some of which were UBS proprietary funds, while others had “revenue sharing” arrangements with UBS. Reading through past statements, Ziffer found evidence of commission funds being replaced by other commission funds (aka “churning).
Ziffer pulled up a Morningstar report and found that 18 of the funds in this client’s portfolio were rated two stars or lower, and five were given a negative rating by Morningstar analysts. Many of the holdings were redundant and undiversified, the broker was charging commissions on the investments plus an AUM fee that Ziffer estimates to have been over 1% a year.
In addition, the couple owned shares in an illiquid investment called Rialto Real Estate, which is available only to accredited investors. “The form that the broker filled out to attest that they were accredited investors was falsified,” says Ziffer. “We presented that to UBS, and UBS settled and rescinded the transaction.”
If you look on the BrokerCheck website, you would find this incident listed as a customer complaint simply for recommending unsuitable investments in private equity, with a note saying that the broker denies the allegations. The report tells us that the case was settled—and the settlement amount is listed as $0, which may be the case whenever a transaction is rescinded.
One wonders how effective are BrokerCheck disclosures that offer such truncated versions of customer disputes. Shouldn’t BrokerCheck be required to provide more detail? It may be helpful to remember that FINRA runs the BrokerCheck system, and FINRA is governed by the brokerage firms themselves.
“People should know that this kind of crap goes on,” says Ziffer. “In my experience, consumers are oblivious to these issues. They need to know what to look for. But my sense is that the brokerage world is always going to be one step ahead of what consumers know and understand.”
Suitable structured CDs?
Cheryl Holland, of Abacus Planning Group in Columbia, SC received a call from a high school friend who wanted her to look at the investment recommendations her father had been receiving from a broker at J.P. Turner & Co.—a broker-dealer which terminated its registration status after receiving (according to BrokerCheck) 30 regulatory events and 12 customer arbitrations. By the time Holland came on the scene, the broker had switched to Voya Investment Management.
The client was in his eighties, and had purchased bonds from the broker as a way to generate current income to live off of. His net worth was around $800,000, including the value of his house and money he had in the bank. But $550,000 had been invested in a type of fixed income instrument that Holland was unfamiliar with.
Holland and William Jeter, a CFA at her firm, scratched their heads and then contacted an expert at a bond trading desk that they use to purchase bonds for client portfolios. His report was interesting. For this 80+-year-old man, the broker had recommended investments that included a CCC+-rated bond yielding 5%—maturing in 2047, when the client would be roughly 110 years old. And there was a BB-rated bond paying 7% that will mature in 2037, right around the time he would celebrate his 100th birthday.
The rest are where it gets interesting. The remaining bonds, recommended for this person who needed portfolio income to pay his bills, were structured zero-coupon CDs that pay no interest to maturity. These are due to mature at various times between 2027 (the shortest maturity) and 2035.
Can put possibly get worse? Actually, it can. The JP Morgan structured CD, due to mature on 2/27/2030, calculates the actual interest that this instrument would accrue in any particular year (not paid out, remember; these are zeroes) is dependent on the spread between the yield on 30-year and 2-year Treasuries. The formula: Subtract the constant-rate 30-year Treasury yield from the 2-year Treasury yield, and then, from that number, subtract 6%.
Whatever this somewhat arcane calculation happens to yield, in that year, you multiply it by 8% to calculate the interest this structured note would accrue in that year. If the number is negative, then the holder of this structured note would get a return of 0%.
How is that working now? According to the St. Louis Fed website, the 30-year constant maturity is 3.0%, while the 2-year is 2.52%. As you read this, the spread is 0.48%. Subtract 6% from 0.48% and you suddenly realize that the bond markets are going to have to steepen dramatically before this investor will ever see any return at all on this “investment.”
“Since 1977, when the St. Louis Fed started keeping information on those two securities,” says Jeter, “the greatest that spread has been in that time frame is 4%. We’d have to go 50% beyond the widest spread we’ve seen in the last 42 years for this structure to earn any actual return for the investor.”
The other bonds are similarly constructed. A JP Morgan structured CD maturing on 4/22/2030 (assuming the client lives into his 90s) provides a 7% return, but only in the highly-unlikely event that the spread between 30-year and 2-year Treasuries exceeds 6.125%. Another bond depends on a similarly unlikely spread between 30-year and 5-year Treasuries; two others pay 1.10% times however much the 6-month LIBOR rate exceeds 6% (LIBOR today: 2.74%). Three others also depend on the 30-year/2-year Treasury spread, and a more complicated vehicle will only pay if the spread times 15 reaches 13.125%. (Currently it is about halfway there: 7.2%)
Did the elderly client understand the sophisticated mathematics and bond rate history underlying the investments that this broker sold him? Beyond that, Jeter points out the diversification issue. “They’re betting the whole farm on one event happening: the widening of credit spreads,” he says. “That’s not, in my mind, a diversifier.”
Holland says that an even bigger problem is the lack of current income for a client who needed income to pay his bills. Since the bonds were placed in the client’s IRA account, this would have become a bigger issue shortly, when the portfolio’s required minimum distributions would have exceeded the yield (or lack thereof) on the underlying investments.
“He passed away only a couple years away from that problem,” she says. “Or else, very soon, he would have had to start taking in-kind distributions.”
The heirs are discovering that there is not a huge secondary market to buy zero coupon bonds that are paying no current interest, and are not likely to accrue any yields from now to a somewhat distant maturity date.
“To make matters worse, these bonds were purchased in small blocks,” says Jeter. “When you’re trading in fixed income, you get worse prices for small blocks, because there is no mutual fund who’s interested in buying a $12,000 block of bonds.” He says that the best prices his bond trader is coming back with are 75 cents on the dollar, with spread and commissions on top.
Holland performed a BrokerCheck search and found that this broker had five customer disputes, all settled for between $1,500 and $60,000, with unsurprising (albeit very short) summaries: “Client alleges misrepresentation of a variable CD during period leading up to its purchase.” You decide: Is that adequate warning to the public about a broker who seems to specialize in this type of “investment?”
The ending of the story: Holland took the case to the state authorities, who spent four months researching it and then simply recommended that she file a complaint. She helped the heirs find an attorney. “He said, yeah, there’s a lot wrong here,” she says. “But my fees are going to be such that I don’t think it’s going to be worth pursuing. So we eventually walked away from all of it.”
Until next time. Holland reports that she has been approached by other former clients of this same broker, who are wondering why the strange-looking CDs in their portfolios aren’t generating any income.
Suitable sales loads?
Finally, William Casey, president of Access Investment Advisors in Manitowoc, WI, tells of a case where a dually-registered advisor put on a sales hat and acted under a suitability standard—illustrating that even where there is SEC registration, the presence of commissions can override the alleged fiduciary relationship.
In this case, an Ameriprise rep had given Casey’s client various disclosures, one of which stated that “Ameriprise Financial Services and our financial advisors owe you a fiduciary duty, as applied under the investment Advisors (sic) act of 1940… This duty generally requires that Ameriprise Financial Services and your financial advisor make recommendations that are not only suitable for you, but place your interests ahead of our interests and the interests of your financial advisor.”
What did this mean in this case? The “advisor” charged a $600 annual “financial planning” fee in the first years, and then raised this to $900. In a wrap account, the “advisor” also charged an annual 1.75% of the assets in the portfolio (paid monthly), whose investments had underlying overall annual expense ratios of 0.75% a year.
There was also a brokerage account, which was not under the wrap fee. Here, the “advisor” sold the couple a variable life contract, a variable annuity and two nontraded REITs—in their IRA account. The VL replaced a variable life contract that had been purchased 11 years prior, and was past its surrender period. The new insurance contract was fully commissionable; the new commissions were apparently never disclosed and the new contract had substantially higher annual premiums than the previous one.
Worst of all, one of the REITs, CNL Lifestyles Property REIT, carried a 21% upfront commission, of which 11% went to the “advisor” and Ameriprise. This unfortunate investment suffered an 80% loss, and since it was in the IRA, there was no way to offset the losses with other gains to provide a tax advantage. Nor, since it is illiquid, can the customer sell out of the position.
The variable annuity? Its annual expenses exceeded 3% a year, with a 10-year surrender penalty starting at 8% for the first three years. That generally implies an 8% up-front commission.
Casey and the client filed a complaint with FINRA and asked the compliance department of Ameriprise to rescind the REIT and annuity transactions. Ameriprise rejected the complaint, saying that the client had signed several fee agreements and a Variable Annuity Purchase Summary and Disclosure form, and also a Direct Investment Application for Non-Traded Real Estate Investment Trusts & Business Development Company—and simply by signing the latter, he “confirmed that his time frame for the investments was long-term and he had no need for liquidity in the investment… We regret if your CNL Lifestyle Properties REIT did not perform to your expectations; however, neither Ameriprise Financial nor your financial advisor can be held responsible for the conditions of the market or investments which do not meet their stated objectives or past returns.”
In this case, disclosure was simply a way to dodge responsibility for the huge fees and commissions that the rep generated. The fact that the advisor had to undergo SEC registration didn’t guarantee that a fiduciary standard would be applied. In fact, it appears that, despite the marketing rhetoric of a fiduciary standard that attracted the client in the first place, the spirit of fiduciary was completely ignored.
The obvious take here is that simply requiring brokers to register with the SEC may not be enough to guarantee that they’ll give advice in the best interests of their customers. In this case, even an explicit, documented embrace of the fiduciary standard didn’t achieve this result.
The question that lingers over these stories is: would a fiduciary standard have prevented any of these tales of abuse? The only answer I can give is that the brokerage community seems to be deathly afraid of being held to a fiduciary standard, for some reason. The reason may be that these extremely profitable, self-serving recommendations might be more easily challenged in court or arbitration under a fiduciary standard than the current suitability standard.
Moreover, it is now common knowledge that the brokerage firms, in arbitration, argue that their brokers were no more than sales people and that their customers should have been better at watching out for their own interests. (They successfully made that argument in their briefs against the DOL fiduciary rule.) Under a fiduciary standard, that argument goes away, and the panel or jury would have to simply look at whether the investment recommendations were in the best interests of the customer. My guess is that few of these very lucrative sales activities—all legal under a suitability standard—would pass that test.
Beyond that, the next question is how long the brokerage firms will continue to get away with visibly predatory behavior against the American public—with little or cryptic disclosure on the BrokerCheck system. Based on past history, it’s fair to assume that no matter how awful the stories, nothing will be done.