By Gail Liberman
Our state and federal securities regulators — despite all the rules we pay them to enforce — often are unable to adequately protect us from a broker’s convincing sales pitch. So especially when you see or hear a tempting financial ad or sales promotion, think long and hard before turning over money.
Take the radio ad I recently heard from one brokerage. The heavy radio advertising came despite the fact that the brokerage founder in 2012 was fined heavily by the Financial Industry Regulatory Authority. He also was suspended for one year from the securities industry, followed by a two-year suspension from acting as a principal. In addition, the brokerage was ordered to pay millions to customers in restitution. The authority’s charges: Unfair practices in the sale of a real estate investment trust and charging excessive mark-ups on municipal bonds and collateralized mortgage obligations.
The Florida Office of Financial Regulation, since 2012, says it received three complaints against this brokerage but took no action. At least two were account maintenance issues, said Tiffany Vause, director of communications.
Do you want details of the complaints? “We can get you an invoice for those,” Vause responded. Authority spokeswoman Michelle Ong declined to disclose whether there were any pending arbitration cases against the brokerage.
The state Office of Financial Regulation completed an exam of the brokerage in April. Again: No action. A class action lawsuit against the company was dismissed.
So where does this leave you, who, like most of us, hope such a radio ad could be your ticket to getting more income in a near-zero interest rate environment?
It leaves you to do some hard analysis of any promoted investment. A heavy focus should be on costs, risks, liquidity, prior disciplinary history of all those involved, and conflicts of interest.
“Be very cautious because the market is at all-time highs,” suggests Boca Raton attorney Lawrence L. Klayman. “Always have another broker you can call to see if the advice you’re getting is adequate.”
While the principal of this brokerage is suspended, that doesn’t stop him from being involved with other investments being sold by the brokerage, including mutual funds.
The brokerage website stresses that it will make every effort to ensure its investments are “suitable” for investors. Nevertheless, it discloses conflicts of interest that make you sincerely question this promise. Among those:
* Only municipal securities that the brokerage trades are offered and the company is not obligated to get you the best price or disclose the mark-up or mark down it pockets. Brokers also may be paid cash or gift certificates to sell municipal securities in the company’s inventory.
* The firm’s brokers may be encouraged to introduce you to certain specific investments. Some may be favored over other investments to increase fees paid to the adviser and the brokerage.
* With certain investments, you could be required to own a brokerage account with this brokerage and pay an annual fee — even if you conduct no further transactions.
* In certain cases, fees for account maintenance services may be paid out of investor funds.
* The brokerage conducts periodic sales incentive contests. Winners get expense-paid business trips to various vacation resorts and/or recognition by the firm.
* Compensation for insurance and annuity transactions is paid to the broker rep as well as to an affiliate, which is owned by a relative of the brokerage founder.