While million dollar Ponzi schemes grab all the headlines, small investors and retirees are collectively losing billions of dollars every year to unscrupulous or fraudulent financial advisors. That’s right - billions.
Broker Greed Costs Small Investors 1% of Accounts Annually
The Obama Administration finally cried foul on this nationwide illegitimate redistribution of wealth from the investment accounts of ordinary Americans into the commissions checks of greedy stock brokers. According to a recent report from the Council for Economic Advisors, which the administration has subsequently vigorously promoted, brokers with conflicts of interest cost their clients about 1% of their individual retirement accounts per year, or around $17 billion. Eat your heart out, Madoff.
The most common way this conflict of interest comes into play is when brokers recommend financial products that are “unsuitable” for their clients’ investment needs in order to gain higher fees or commissions.
Investors’ Portfolio Must Be Suitable for Them
Suitability is the core concept in most investment disputes, and it’s something the current administration would like to see more highly regulated. In a nutshell, financial advisors have a professional and legal fiduciary duty to act in their best interest of their clients, even when that means sacrificing an opportunity for themselves to make more money. That duty dictates that brokers put together a detailed investor profile for each client or client group, including such key information as age, life situation, employment status, net worth, risk tolerance, investment objectives. Using this investor profile, the broker then builds a portfolio that reflects the profile. Another obligation the broker has is to conduct a due diligence investigation on any financial product he or she recommends to a client. Individual brokers don’t have to do all that work themselves, but their firms do, on behalf of their brokers. If any link in this chain of knowledge and matching breaks, brokers and their firms may be liable for negligence.
Many small investors will be shocked to learn that their trusted financial advisor has created a portfolio that serves his or her economic interest above all else. But in many cases, it’s this trust, combined with investors’ lack of sophistication when it comes to complex securities, that allows stock brokers to get away with deception and fraud, often for years.