In the 1978 classic college movie “Animal House,” Eric “Otter” Stratten (played by Tim Matheson) gives the following defense to disciplinary charges against his Delta Tau Chi fraternity.
“But you can’t hold a whole fraternity responsible for the behavior of a few, sick twisted individuals. For if you do, then shouldn’t we blame the whole fraternity system? And if the whole fraternity system is guilty, then isn’t this an indictment of our educational institutions in general? I put it to you: isn’t this an indictment of our entire American society? Well, you can do whatever you want to us, but we’re not going to sit here and listen to you badmouth…the UNITED STATES OF AMERICA!!!”
I was reminded of this great scene as I read ccdaniels’ online comment to my column in the February issue of Investment Advisor: “Is FINRA the Fox Guarding the Henhouse?” about a recent FINRA study of its own mandatory dispute arbitration policy.
Here’s what “cc” had to say:
“I know the author is being snarky for entertainment purposes, but I think he woefully underestimates how many claims are frivolous. It is unfortunate that any clients feel aggrieved and, I think, 43% seems like a high number that got ‘some’ money. The author seems to be on the side of those who think most BDs are corrupt.”
First let me point out that there are two other, equally important, reasons for being snarky:
1) When I’m writing about a person or group who very much deserves to be snarked, and
2) because it’s fun.
But more to the point is cc’s contention that “The author seems to be on the side of those who think most BDs are corrupt.” This is a page a right out of Otter’s speech, and clever enough (by today’s admittedly lower standards) to make one wonder whether “cc” works now or once worked for FINRA: “To criticize mandatory arbitration is to question the integrity of the whole brokerage industry…”
Consequently, I don’t think this “charge” requires a defense, but in the interest of setting the record straight, I’ll provide one anyway. According to the online Merriam-Webster dictionary, the definition of “corrupt” is: “Morally degenerate and perverted.” I don’t think brokerage firms fit this description (well, not most of them, anyway). In fact, I think most firms do exactly what they are supposed to do: sell securities. And as employees of their BDs, when brokers “sell,” they are representing (as registered representatives) the best interests of their firms, and often (by extension) the interests of the product manufacturers that their BD has agreed to represent.
Heck, there’s even an exemption in the ’40 Act that says brokers don’t have to put their clients’ interests ahead of their own—or their firms’—when they are “selling” securities.
Of course, brokerage clients don’t always understand that they are being sold, rather than being “advised.” And some brokerage tactics, such as using the term “advisor” to describe brokers (or even “trusted advisor”) or allowing to brokers to be “part-time” advisers during a single client engagement do seem to contribute to the confusion of their clients.