I wouldn't quite call it a concrete example.  I get the point, but it's far from a slam dunk.  It's an example of a broker with bad timing (possibly questionable judgement) and even more stupid clients for letting their advisor talk them into something that was against their better judgement.   

So, let's talk for a minute about what would have happened had the broker agreed with them and put all of the money into muni bonds in 2006.  I'd estimate, based on personal experience, that when it all hit the fan in that late summer/early fall of 2008 they might have lost somewhere near $250K (roughly 25%) in munis when we went through that crisis.  Insurance wouldn't have protected their principle because the bonds didn't default, just repriced.  So, this broker was pretty much screwed either way.  He could have done treasuries.  That would have been a pretty decent call in hindsight.   

It didn't go into specifics about which mutual funds they used.  Do you have any of that info?  Did they use C shares or A shares or a wrap account?  Did they go with aggressive stuff or play it safe with something like a balanced fund?  What did the broker get paid on the mutual fund trades vs what would he have been paid on the muni or treasury bond trades?  Need more info for a good discussion.  

I think it's a bad mistake to be making fiduciary calls based solely on performance issues like this case did. 

I'm just looking at the loss vs the settlement and there has to be so much more to this example we don't know. Did the client say" but we don't mind if we take some risk because we really did well on the sale of the house. How much asked FA ? 10-15% loss is within our risk level since the stock market looks pretty good right now.... said client."

Also , the translation of fiduciary=pay 100% of client losses vs agent = FA is off the hook is false. Many of us have seen through the years clients win awards that are not  justified. We as a family of professionals keep much better notes now-a-days.

They told their broker at Wachovia (since purchased by Wells Fargo) that they wanted to invest the money for a year or two and then retrieve it to buy a new house.

Stupid comments and rationalizations. The goal is capital preservation, the stated time frame is one year.

Broker or RIA other hired professional should be hung from the nearest tree.

A shocking example of the inability to match a goal and time frame with an appropriate investment.

In Slate magazine, Timothy Noah writes that brokers should be held to a fiduciary standard, citing the following example offered by securities attorney Stuart Meissner:

So in the example, a couple has a financial planning goal of buying a house in one year. They have some ideas, but delegate (hire a professional).

They end up losing $137,000 ( plus stress, opportunity cost of not being able to meet goal of having cash, and so on).

The b/d allegedly hides behind the rules. Would anyone on this board not be outraged if this happened to a friend or family memeber?

Do I even need to point out the potential temptation, under b/d rules, to stretch out the time frame or risk tolerance in order to get paid?

This would not be a problem if the b/d was stepping up. The rr should have options like: (wrap account with brokered (insured) Cds), very short and liquid instruments,  or charging a fiancial planning fee for advice, that would align client, advisor, and b/d interests.

As far as using A shares or C shares, really? A one year time frame could mean less than one year. This is an excellent example of why RIAs and rrs should be regulated the same, and 12b1s and commissions need to go away.

Did they go with aggressive stuff or play it safe with something like a balanced fund? 

Is this a joke?

1-2 yr time frame with a defined purchase the the end.  Their broker was an idiot and does not need to be in business.  I sell those people a CD and move on.  I cook with crock pots in my office .. not microwaves.

That's funny, Sman.

Editor, thanks for bringing this case, what an excellent example.

Back in the day, if you wanted to buy securities, you had to go through a broker.

When it got easier to buy stocks and bonds, brokers started calling themselves financial planners.

The same guy who is going to advise you on retirement planning and funding college needs to be held accountable for accepting your gambling orders (unsolicited).

If the client wants to be moderate to aggressive in a short period, the broker needs to advise against it, and not accept the business, or place the money appropriately, if he is acting in position of advisor.

It is just plain confusing and silly to assume clients will understand the difference or take responsibility between solicited and unsolicited business, where that is the case.

Now I am your advisor, now I am just an order taker. By the way, given your goal and time frame, I could make a nice commission if I was just an order taker in placing this money.

The b/d is technically on solid ground, and the status quo is hurting advisors and clients - the entire planning profession - and enriching the b/d. Not acceptable, we have been watching this thing play out for decades and with regulatory reform we're finally getting closer to becoming accountable to the general public.

I wouldn't invest money that is needed back for at least 36 months. And, if in this case, there was a real and defined need as vital as home ownership, it'd make me even more conservative. There are treasuries and cds for 24 months and less, but really there isn't a muni place to go for that short a period. Unfortunately, the broker clearly put a square peg into a round hole. There's missing details for sure here, as to specifically what kinds of funds were bought, but a broker needs to be very in tune to capital needs, and clearly this case demonstrates he put himself over the client. The award as small as it was, only 90k, suggests that there were mitigating circumstances, and maybe the investors were slightly less than innocent.

This is precisely where we fall down. Clearly the trades were either solicited or unsolicited.

If they were unsolicited, why should they be accepted by someone calling himself a "financial advisor" who recognizes the inappropriateness of the investment?

If the trades were solicited, this implies they were bought upon the advice of the advisor.

Words like "mitigating circumstances" and "slightly less than innocent" make us all look slimy.

The b/d is not taking responsibility for the reps actions. There may be mitigating circumstances, but I doubt it.

I don't understand why retail advisors sell themselves short to the profit of the old b/d model. If the trades were solicited and someone is making excuses, I find that insulting and damaging to the industry ( and I am b/d affiliated). If they were unsolicited, what is the problem?

We're just screwing ourselves by pretending this is okay.

Now we are waiting for the government to come in and tell us what's right, because we are doing a poor job of self regulating. Disgusting. I'm tired of being affiliated with losers and liars.

One guy turns the business down and the next guy puts the money in A shares. How is this different than forging a signature? If he's stupid, there's E & O. If he's just bending the rules, his firm will back him up and he gets to stay around if he doesn't do it too much or if he's a big producer.

If you want to keep doing business like this, keep soliciting but make sure you identify yourself as a dealer at a casino table. This makes every honest professional in our industry look bad. Between honest RR advisors, this makes us slaves to subsidize the real money.

RR Lady - No, it’s a matter of anonymity. We are personally responsible and can be legally accountable for our comments and opinions. Obviously you can see the diversity in this short thread.

Times 7 - No one could of said it better. Thank you.

For the rest of you, if you call yourself anything that even resembles an advisor and you place the order you own it regardless if it is solicited or unsolicited. If its not an appropriate investment for your client then send them to a BROKER!

The more I read this thread, the more familiar the story sounded.  So, I did a search and found this thread year ago when this story broke:  http://forums.registeredrep.com/forums/whats-firms/nj-couple-pays-dearly-financial-advice

It's funny that a year ago the advisor may have been a bit of a dim bulb, and plenty of people disagreed with his choice of investments for a two year time frame, but everyone thought the clients were flat out lying.  Today the clients were misled, the broker acted only in his own best interests, he's a liar and a loser, and anyone who doesn't fully side with the clients on this one is cut from the same cloth and should be drummed out of the business.  

Would this even be a conversation had they invested that money in 2003 instead of 2007?  Would the recommendation have been viewed as the right one, even though a fiduciary standard might have dictated otherwise, if the clients had made $200K on those trades?  That fiduciary standard becomes a double edged sword pretty quickly.  We can't have it both ways. 

Thanks, ND.

No Spiff, over the past two years we have seen time and time again that people are calling themselves advisors and then acting as a broker. I think a clear line needs to be drawn between the two or better yet require us all to have the clients best interest at all times regardless if we are paid commission or fee. Otherwise send the customers to etrade et al

RR LADY - No offense meant but one place is enough. Others may have more time/desire than I.

Would this even be a conversation had they invested that money in 2003 instead of 2007?  Would the recommendation have been viewed as the right one, even though a fiduciary standard might have dictated otherwise, if the clients had made $200K on those trades?  That fiduciary standard becomes a double edged sword pretty quickly.  We can't have it both ways. 

Spiff, why would it matter whether they made money on the investment?

Did they go with aggressive stuff or play it safe with something like a balanced fund?

What did you mean here? Do you believe it is appropriate for an RR to recommend a balanced fund as being safe for a one year/house purchase goal?

You seem to be making the case for increased training and accountability on investment practices for b/d reps.

[quote=RR editor]

As a side note, can I ask you all if you would ever post these comments on the blog itself? Is it a matter of needing a separate login, which makes it annoying? Or is it a matter of simply being familiar with this forum format? Just curious. We're trying to generate comments on stories and blogs too, but it just doesn't seem to happen!

[/quote]

I can't speak for others but I don't read blogs because they express the opinions of others which I could careless about, I've got my own.   If you want to increase volume to your blogs focus on how we can build our business and increase revenue.  Just my opinion.

The couple checked the growth and income box (or it was checked afterwards).  Either way, unless they had a copy of the original account documents, they shouldn't be believed.

These people, like ALL people who got burned during this downturn, think that they got "screwed" by someone. 

Here's some questions people should be asking:

Where were these people going to live for the 1-2 years they didn't buy a home?

Why were they waiting that long to buy a home?  Because they "knew" the housing market was going to drop?  If they did, they are more savvy than they let on.

Why didn't you document your conversations with the broker?

If you had concerns, why didn't you go to his supervisor?

They don't have answers to these questions, because these people are LYING.

The broker is dumb because he didn't document everything.  I had a similar situation, but I documented everything, and when the client spewed his lies, I was able to show through emails, time-stamped phone calls, etc. that I didn't do anything shady.  Complaint was dismissed quicker than a heartbeat.

 Daindy, your narrative looks like more rationalization.

The burden of proof is on the broker.

Based on the (case study information) link to the article, why do you call the clients liars?

A fiduciary duty[2] is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust. (WIKI).

It seems there are some scary knowledge gaps in recent posts. If you are going to make a pile of money, as you point out, you better document  the whys. Calling the clients liars points out the (incorrectly) perceived "grey" areas that go with being a broker, I guess.

" I'm a broker, beotch!".

I guess the b/d not settling up makes that real. It was pointed out that this was a settlement so there must have been extenuating circumstances, I guess we'll never know. In my experience, the only place you are likely to receive indemnity would be from collecting on your own insurance.

It seems the big problem with our industry ( for career advisors) - is that on the one hand you have advisors chasing clients around for a quick buck, and on the other you have the costly investment and meticuluous work of being a professional. Except in this case, the clients apparently came to the broker by referral. Doesn' t this make you feel cheap and dirty? Don't answer that.

Rationalization?

Hardly.  The news article is biased entirely towards the couple who feels "wronged".

There is a lot of information missing, which I pointed out.  Here is a link to Bill Singer's article on the subject:

http://www.brokeandbroker.com/index.php?a=blog&id=499&print=1

The recordkeeping was poor, but so is the information provided about this case.

You assume that a fiduciary would act any differently and would be held to a different outcome.  Let's ask this question:

Would this person have violated their fiduciary duty if the clients originally came in and said "the market is up 20% since last year.  we want in on that.  we just sold our house"?  Then as the market begins to tank "we needed that money for a house". 

Look at the timing of the complaint and then look at the market. 

 Does it not strike you as odd the timing of their complaint?  Three months AFTER THE MADOFF SCANDAL.  This was when my complaint happened.

These people are liars.  All evidence points to it.  For anybody to assume otherwise, you are being naive, or that is what you tell your clients about your competitors. 

Also, they sold their house in April 2006 and begin looking for someone to invest the money but didn't do so until December 2007, a full 20 months later?

As you point out, and Bill's link shows, we don't have all the facts.

I  don't see how you can draw any conclusions here, especially calling the clients liars.

You assume that a fiduciary would act any differently and would be held to a different outcome. 

That's the entire point of this thread. On the one hand, we don't have all of the facts, and on the other,  you are bringing up things like market timing, Madoff, and defending the broker by attacking the character of the client.

The only facts are, there was a complaint and there was a settlement. If the advisor was careful with documentation, there might have been a complaint, but there would have been not settlement.

The fact that there was a settlement means either the b/d got off cheap and will tighten up documentation or perhaps would maintain less documentation and play fast and loose with the truth.

Since you are willing turn this all into grey matter, you tend to make the case for a higher fiduciary standard, just by you behavior in this discussion.

With regard to fiduciary, of course client trust was breach because there was a settlement but the client was not indemnified.

You assume that a fiduciary would act any differently and would be held to a different outcome. 

Of course. The standard should be absolute: either the documenation is in place, and the client understood or did not understand. I don't think folks understand just a little when it comes to things like documented time frame, goals, even potential standard deviation of a portfolio.

If there is a dispute, someone reviews the documentation and there is a decision. The client hired you because she trusted you and wanted to delegate, so the burden is on you to comply with anything the courts or arbitrators will ever want. These decisions should be yes or no decisions. If the courts will not allow us to do business, we should stop representing clients and let people make their own mistakes.

You and I both know what game is being played and I am affiliated with a broker dealer myself. I'm proud to be an RR, and I'm proud of the compliance services provided to me.

Don't forget about errors and omissions. If you make a mistake, fess up and pay. Don't put yourself in a position where there are grey areas that you can exploit. Either you are right or you are wrong. If you forget to do a transaction or make an error, do you get to split the difference with the client? I don't think so.

The sooner we all work as fiduciaries the better. We can stop suffering, and do more business as real professionals. We can work by referrals and trust and do without the smoke and mirrors. It is going to mean less fast money and harder work. On the flip side, it will be better for the public and more business for RRs.

( The very fact that all of this is thrown into arbitration where there is a negotiated settlement makes us all look cheesy. What part about proper fiduciary documentation is unclear? If the documentation was 30% corrrect, the broker dealer (advisor) should penalized 100%. Go back to the definition of fiduciary. This stuff needs to be done online and in real time. The fact that brokers work for commissions is not the real problem, the real problem is making sure the client understands the risks and that is documented.)

For small shops, I think independent b/ds are in a better position to provide the necessary compliance and supervision than would a solo RIA. Done right, this should bode well for our industry. What are we waiting for?

What are you afraid of, and why would you defend something or attack another person's character when you don't know all of the facts?

It should be obvious from some of the posts on this thread that there are knowledge gaps and there is a need for better accountability.