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Balancing Act?

Not when it comes to the interests of an advisor's client. They win out over your firm's dictates every time, though an advisor should be diplomatic in dealing with their supervisors


I am a 17-year veteran with no compliance marks against me. I work for a regional broker/dealer and was included in your 2003 outstanding brokers article.

As regulatory issues become greater, I'm growing more concerned about making sure that I do what's in the best interest of my clients, which is not necessarily what's in the best interest of my firm.

What I want to know is specifically how an RIA, independent or full-service organization, affects marketing and communication with my clients? Should I be acting in a client's best interest or in the firm's best interest? How should I balance these interests? And, what should I be concerned about? How might I make a mistake in this area that could hurt me and my career?

I'm afraid if I go to my office manager, I'm not going to be given a straight answer and may be labeled as a troublemaker. What should I do?


First, here's some good news. You already know the answer to your question. You demonstrated that by being troubled enough by what is going on at your firm to write to “The Ethical Rep”: the answer is that your duty is to your client. Legally, brokers may be fiduciaries in any state depending on the nature of their broker-client relationships. In some states, like California, a fiduciary relationship is presumed. In any case, when clients act on your recommendations they are often trusting you with savings they cannot replace.

At what point do you reject employer pressures and act for the greater good of your clients and, ultimately, your reputation, your central registration depository record and your career? At what point do you say “this far and no farther”?

You're a 17-year veteran. You undoubtedly remember the Prudential limited partnership scandal: Hordes of retirees were ruined because their investments were concentrated in grossly unsuitable limited partnerships. Losses like that bring incalculable sadness into the lives of people who have done nothing wrong, just trusted an advisor because they felt they lacked the expertise to do anything else.

Losses like that can also ruin a broker's book of business. And where was the firm in the limited partnership debacle? Was it rushing to compensate its investors? Did it compensate its veteran brokers, many of whom trusted the firm's due diligence processes, for the destruction of their incomes, the loss of their reputations and the burden of having fat CRDs? You know the answer to these questions as well.

Firms have the luxury of being able to paper over their scandals by spending billions of dollars on advertising. Some change their names. Regulators don't publish statements counseling the public to check a firm's regulatory record before opening an account. But they do tell the public to look at NASD BrokerCheck before dealing with an individual broker. So your firm can pick up hordes of new customers. But where does that leave you if you succumb to your firm's sales pressures?

How would you feel if you were reading a medical journal in your doctor's waiting room and saw a bioethics column with a question similar to yours? What if your own doctor was writing to express concern about recommending an effective, non-invasive procedure because it would eliminate the need for a more profitable surgery? What if your own doctor felt the need to balance the patient's best interest against his or her practice group's best interest?

As a stockbroker or a financial advisor, you want to be perceived by clients as professional. (Though not, perhaps, in terms of overtime pay. See the cover story in Registered Rep.'s May issue.) What it does mean, though, is that if you expect to be perceived as professional, you have to act in a manner consistent with what you expect of other professionals. So, if you're considering doing something that would shock you if done by your doctor, you should have serious misgivings about doing it yourself.

Someday, you're going to look back on your life and career. How is it going to look to you? Will you be able to look in the mirror and say, truthfully, that you've helped the people who trusted you with savings they couldn't replace? Will you be able to say that you made your clients' lives better, that they still trust you, that they're glad your paths crossed? Or will their portfolios (and their relatives' and friends' portfolios) long since have migrated to direct-purchase index funds?

We're living in shocking times. Wall Street giants — household names that used to be trusted — collectively have paid billions of dollars in fines for lying to their customers and the public. Yet some brokers have managed, in the midst of the insanity around them, to stay the course, to shun the contest and the quick buck and to build comfortable lives for their clients and themselves. That could be you.
Scot Bernstein, Esq.
Sacramento, Calif.

[email protected]


This question demonstrates the depths many in the securities industry now find themselves. Qualified and experienced financial-services professionals are being asked on a daily basis to compromise their integrity and professional stature to accommodate requests by their firms by placing clients in particular products. Although these demands may seem harsh and ill-conceived, their firms justify the demands by claiming the firm has done the appropriate due diligence and the product is favorable to all involved.

However, let me be clear: Under no circumstances should anyone place their own or their firm's interest before their client. If a choice is made that compromises this guiding principle, both you and your firm will find yourselves in great (regulatory) danger. As such, balancing these interests always carries with it great responsibility as well as careful planning. Nonetheless, the balancing scales should always tip in the direction of the client.

The questioner alludes to the fact that many firms are using registered investment advisors to prepare various model portfolios and provide investment guidance for clients. Firms then earn fees-based upon percentage of the client's portfolio invested by their clients in these services. Registered representatives are usually the ones that lose out in these programs because, once the client is in the program, the rep earns very little in commissions.

The firms counter that this business model is in the best interest of their clients because the portfolio method spreads the risk for the client and the client pays less in fees than what was paid in commissions. Essentially, these firms have moved away from the straight commission model to the fee-based program model because there is a general sense that the drive towards commissions caused many past scandals.

Unfortunately, as with other reactive tendencies, this approach tends to “throw the baby out with the bath water.” That is, there are situations when these fee-based programs do not satisfy a customer's needs. Firms, thus, still have to consider that individual clients may be best served by commission-based transactions and not these model portfolios.

Of course, the only stopgap mechanism is the registered rep. The rep must approach each client as an individual and conduct their own independent review of the client's needs. Without this independent review, such a client placement may spell trouble for the questioner and others in his or her position. If there is no review and troubles arise, an unblemished career will be a distant memory.

Additionally, instead of earning a living, the registered rep and firm could undergo the brutal and expensive securities arbitration process or, worse, a regulatory action. Legal fees, possible settlements or awards may cripple you and your firm financially.

Naturally, you look for support from your firm to assist you in these trying times. Unfortunately, you begin to sense the unnerving feeling that you are alone. Why you ask? Simply stated, you feel threatened because you believe that your office manager will single you out for retribution if you raise your concerns. Such feelings are all too common in today's securities industry. However, you cannot change this problem overnight. You should consider an approach where you seek out another manager or compliance director for information about your quandary. Such reconnaissance will assist you in assessing your firm's position on these issues without exposing yourself to possible repercussions.

However, no matter the course of action you choose, you may have to ultimately select your client's interest over your firm's position. If this scenario occurs, there may be temporary pain, but you will have saved your reputation and avoided severe regulatory penalties.
Ernest Badway,
Saiber Schlesinger Satz & Goldstein
Newark, N.J.

[email protected]

Ethical Rep is a monthly feature in which more than 30 prominent securities attorneys, experts and law school professors help Rep. readers deal with work-related ethical quandaries. Have you encountered a situation at work that makes you uncomfortable? Are you confused about how your responsibilities to clients might change as regulations continue to evolve? Drop a line to Rep.'s contributing editor, Ann Therese Palmer, and our group of experts will help you work through the problem.
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New York, N.Y. 10011-5300
[email protected]
Fax: (913) 514-3890.

Due to “technical difficulties,” as they say, “Ethical Rep” has been receiving less mail than usual. An intrepid reader, who emailed a question, called the desk when his email bounced back.

We apologize for this snafu. And if you've submitted a question, please resend it to [email protected].

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