improper use of discretion

Broker-Client Communication Breakdown

If you don't read past the first sentence of this entry, hear this: you are the client, and your financial adviser works for YOU, not the other way around. We're often dismayed at how readily investors surrender their authority to brokers. Part of this could be due to the fact that financial advisors have a high degree of expertise (that's why you hired them), and so we defer to their expertise. Plus, brokers tend to want to control their own domain. As professionals who are constantly being scrutinized by their bosses, FINRA, the SEC, and who knows who else, they'd often rather not be engaged in constant communication with their client as well--especially when things aren't going so well. But, brokers need to remember to whom they owe their primary fiduciary duty. In salesmen parlance, it's a version of the old nugget, "The customer is always right." In all the froth and fury of trading, brokers can often forget that ultimately they're providing a service to their clients--and that the client, the customer, is always right.

In a perfect world, financial advisers wouldn't need to be reminded of how fiduciary duties break down, nor how discretion works. In our not-so-perfect world, it's up the client and, in situations where communication really breaks down, FINRA's job, to remind them. And, well, when FINRA has to remind a broker, it's generally in the form of penalties, fines, and suspensions. A recent article suggests that FINRA is sending out more and more of these stern reminders. Since January, the regulatory agency has disciplined 17 different brokers for "improper use of discretion"--more than twice the amount in the same period of time last year.

ere's the takeaway: unless you the client give your broker full discretion to make all investment decisions on your behalf, he or she must seek your approval before making any trades in your account. Period. What may seem like common sense--your broker checks in with you before taking risks with your money--doesn't always shake down that way, unfortunately. Remember the perfect world thing... Many brokers--whether it's because they're feeling cavalier, or because they're chasing a hot investment opportunity, or because they can't reach their client quickly enough, will take the liberty of making trades in non-discretionary accounts without explicit client approval. What's worse, this seems to happen most often with elderly or less sophisticated investors who simply fail to recognize the unauthorized trading. By the time they do, the consequences are often dire. 

Here's what investors can do to help prevent improper use of discretion:

1) Check your monthly statements and the confirmations of account activity that are mailed to you. If you see trades or other activity you don't recall authorizing, call your broker immediately to discuss it with him or her. If your broker acts fishy, call the branch manager.

2) eep notes or other written records of your conversations with your broker, noting key issues and information, such as the date and time of the conversations, what recommendations were made, what particular investments were discussed, etc.

3) Stay in frequent contact with your financial adviser. It's your money, never forget it, and the more closely you stay in touch with your broker, the less likely he or she will be to take liberties with your money. If your financial adviser does not return your phone calls in a timely fashion or otherwise proves inaccessible, consider it a red flag and contact the branch manager.

If you or anyone you know has been the victim of improper use of discretion or any other form of broker misconduct, please contact us immediately for a free consultation.