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Industry Spotlight > Broker Dealers

Never cheat widows and orphans

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Disgusting is the only way to put it.

Associated Press reports on the plight of Susan Bernardo, a single mom raising a son after her husband was killed in an accident. She received a settlement, as did her boy, who was three-years-old at the time of his father’s death.

Her broker recommended she sell her positions in municipal bonds for higher-return partnerships in energy and real estate investments in order to boost her income. Higher returns are of course accompanied by higher risk, something she claims she was never told, or at least just how risky the new investments were. She also claims she wasn’t informed of the fat 5% commission her broker collected.

Her portfolio value is now halved, and she has to dip into her son’s settlement to help pay the bills. One problem—the broker has him in variable annuities with equally stiff contingent deferred sales charges. The money’s locked up, and the wire service claims “more than a third of every dollar goes towards penalties and taxes.”

Knowing the media’s penchant for “if it bleeds it leads” sensationalism, a few questions are raised by the piece but never answered. We all know of star analyst Meredith Whitney’s famous prediction on “60 Minutes” that a massive wave of municipal bankruptcies would plague the land, causing a market crisis far worse than what was experienced in 2008.

Even though it never happened, was the broker acting according to these predictions when selling Bernardo’s “relatively safe” municipal investments? What about the term “broker” itself? Industry survey after industry survey reveals low awareness on the part of the general public as to the difference between independent advisors, brokers, wirehouse reps, etc. Did he truly hold himself out as simply a broker? What credentials did he offer? How did he market/describe himself to Bernardo? What about her son? Did the annuity include some sort of guaranteed income rider? Would money be available for college, a first home and other milestones to help him along the way?

Again, questions raised but never answered; not that any of it matters, since it’s a massive suitability fail on the part of the broker. Horror stories like these are fueling the Obama Administration’s push for a fiduciary standard overseen by the DOL. SIFMA notes that regulators don’t have the necessary expertise to craft a bill that would do anything other than hurt access to quality advice for small investors. And they’re right, but it is an uphill battle.

Industry experts said that if the industry was regulated more like lawyers and doctors FINRA wouldn’t clear so many brokers accused of wrongdoing. Such a claim only serves to reinforce SIFMA’s point. If critics ever actually dealt with FINRA, they’d understand the demanding taskmasters for whom they are, not the “self-funded” stooges the piece attempts to paint them as.

Baby boomer retirement is front and center, which is the reason for headlines and resulting regulatory proposals like this. You can also add lawsuits to the mix, as a number of high-profile cases involving alleged fiduciary fails on the part of 401(k) plan sponsors have recently come to light, with one making it all the way to the Supreme Court. It’s the industry’s version of the new normal, slated to only get worse, which is why strong ethics, and the practices and procedures that back them, are more critical than ever.