DennisBeaverJanuary 01, 2011 (Original publish date) • By Dennis Beaver

When Pirelli of North America closed its Hanford tire plant in 2001, hundreds of employees lost their jobs. Months later, one of the former employees – who I will just call Bob – received a call from the local stockbroker who was managing his retirement accounts.

“He advised selling our mutual fund investment and purchasing another one, offered by a completely different family of funds. We trusted him. Days later, I received a statement from the old fund which showed that I was charged $7,500 for leaving it. I just learned that if we had remained with that fund a year more, I would have owed nothing.”

“The new fund he sold us had a 5% commission, so we lost thousands of dollars! We thought that he was our friend, looking out for us. Doesn’t a stockbroker have a duty to do what’s best for the client? Can you help us?” Bob asked.

“We are no different than used car salesmen”

“We sell a product, but before you will buy, I have to sell you on the idea that you can trust me with your money,” Central California Stockbroker X told me. With close to 20 years in the field, he was very open about the risks of becoming too chummy with brokers:

“To keep our jobs, we have to sell, and this becomes easy when I become your friend, because friends trust friends. When you get close to us, when you trust us, you can often wind up on the losing end of a bargain. Rather, think of a stockbroker as a used car salesman. Trust should have nothing to do with a buying decision. You need to keep your distance and always be skeptical of our recommendations.”

In fact, under current law, while brokers are not licensed to lie, they do not have to act in the customer’s best interest. In reality, there is a built-in conflict of interest between what’s best for the broker – selling investments with high commissions – and the customer, who wants a good investment at a lower price.

Philadelphia-based attorney Nick Guilliano, who specializes in securities and investment fraud, recommends that instead of asking advice or direction from a stockbroker, it is far better to use a fee only Registered Investment Advisor for that purpose.

“Stockbrokers are in the business of sales and not advice, and this is so critical to understand. By federal and state law, an RIA is held to the highest ethical standards, is a fiduciary, and puts the client’s financial interests first.”

“Beware of the title Certified Financial Planner, because this does not mean the person you are dealing with is a fiduciary,” he stressed. “It is important to find out how the person you are dealing with is compensated. It might not bother you, but you need to know.”

Attorney Guilliano added, “Most brokers are not crooks. 96% have never had a complaint filed against them.”

Why wasn’t I told to sell before the market completely crashed?

“I phoned my customers and told them that things were looking horrible in March of 2000 and again in 2008, but I also heard brokers urge worried customers to hold tight and not sell. There were so many brokers who responded with indifference, treating their clients as if they were overreacting, and in some cases refusing to comply with the client’s sell order, while the market continued to fall.”

“It fell 57% from the highest point to the lowest and people lost millions of dollars they didn’t have to. Too many brokers were in denial. A few of us did recommend selling, preserving capital, and then waiting to get in when things clearly were getting better, but most brokers did absolutely nothing.”

“But there is no legal duty – no obligation at all – to call a customer and recommend selling, even when things just look terrible. You will always get a call from your broker, urging you to buy some stock, but almost never to sell. Remember, we are not watching out for your best interests – you have to protect yourself,” Stockbroker X warns.

Duty of suitability

“A stockbroker should not sell a customer something which is inappropriate or not suitable. For example, selling a 70-year-old a deferred annuity which will begin to pay after he is 80 is just not suitable, it’s wrong. Or, using a customer’s fear as a basis for recommending a particular strategy, such as fear of a global depression, and advising putting all your employees pension money in gold. Remember when gold fell from $800 an ounce to around $300?” X asked.

And Bob? After You and the Law had a little chat with his broker’s office, all the money he was out was returned.


Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.



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