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Fiduciary Versus Suitability: A Concrete Example

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Feb 10, 2011 9:06 pm

lovin - the complaint wasn't dismissed, they just didn't get all of the losses back they were looking for.  They originally wanted $227K+, but the arbitration panel gave them $90K.  Even Bill's commentary says it's strange that we don't know why they didn't get the full amount back.  What's even stranger is that the FA didn't cough up any of that $90K himself.  And he's still employed at Wells Fargo.  At Jones if you cost the firm money for something you did they make you pay some of it the majority of the time.

And they didn't just sit on the money until Dec 2007.  The originally gave the money to JPM Chase to invest in CDs and "principle insured" munis.  They got their panties in a wad over the customer service they were getting at the bank and moved the money to Wachovia in Dec.  Where they evidently preceded to ask about CDs and insured munis again.  For the next year or two. 

This is the part that I don't understand.  Why didn't you just switch banks?  In fact, why did you take all of the money to one bank in the first place.  If the insurance was important to you then you should have been using at least 4-5 different banks to get the full FDIC coverage.  And if you were buying insured munis, someone should have explained to you what that insurance actually covered. 

So, why go to a brokerage firm from a bank.  How many clients have you guys ever gotten because  you have the best CD rates in town?  Good muni rates on long term bonds, yep.  Good fixed annuity rates, yep.  Good dividend paying stocks, yep.  Best CD rates, nope.  Not a one.  That's what banks are for.  My guess is that they were, to borrow a native american phrase, speaking with forked tongues.  They were unhappy that they weren't making  20% in 2006 and 10% in 2007 like their buddies were so they told the FA that they wanted to try to do a little better than their CDs, but didn't want to go crazy. 

They argue that they never checked the growth and income box on the account documents.  They say they never saw it, just signed what was put in front of them.  Well, then you're just stupid.  When anyone puts a document that says page 47 of 50 and I haven't seen pages 1-46, I'm not signing anything. 

Times, ND - I'm going to admit that I'm not quite sure where you draw the line with acting as a fiduciary or not.  What I mean by that is that I know I'm not a fiduciary to my clients.  But how does charging them a fee vs a commission make my recommendations to my clients any better or worse? It gets pounded into our heads at Jones from day 1 that we should always do what's right for our clients. I like to think that my recommendations are always what I think is best for my clients.  I take into consideration their age, risk tolerance, goals, objectives, and investment preferences and we go from there.  How would my process change if I were acting as a fiduciary? 

The FA and Wachovia in this example didn't do themselves any favors.  After the third phone call in 2008 with panic in their voice and two attempts to talk them off the ledge, those holdings should have been in cash.  The clients didn't do themselves any favors either.  After the third phone call that the FA didn't agree with me, I'd have found a different FA.  Both of them should have reacted quicker.  Why the clients stayed with that guy is beyond me.  Why he wanted to keep them is even more of a mystery.   

Feb 10, 2011 9:19 pm

Times - how can you say I don't have all of the facts and in the same response say, "With regard to fiduciary, of course client trust was breach because there was a settlement but the client was not indemnified."

Also, to speak earlier "A shocking example of the inability to match a goal and time frame with an appropriate investment." 

You are clearly on the side of the clients in this case.  You aren't even sure if a mistake was made.  That said, neither am I.  Although I speak from experience from someone who has been the respondent to a claim on two occasions.  Both times, the client lied through their teeth.  And when the documentation was thrown in their faces, they realized they got caught.

Sloppy recordkeeping doesn't make someone in breach of fiduciary duty.

Clearly, in a non-discretionary account, much of the onus is on the client.  If the facts point in the direction of the broker being a dirtbag, then I will eat crow.  However, how is the burden of proof on the broker? 

That said, I disagree with the notion that independents affiliated with b/d in some way are "better" than RIAs.  There are less complaints against RIA's on a percentage basis than there are against RR's.  What does that tell you?

Tells me a couple of things.  Some attorneys know it's better to sue these big firms, because they can get a better payday.  It also tells me that RIAs are keeping their clients happy.

Not to say indy RRs don't.  But look at the stats. 

I have clearly seen clients lie about their situation, even when they are repeatedly informed.  Saying, "I never checked that box" is not the same as, "well, we checked the box, but we asked the broker to change it" as the arbitration panel concluded from Bill's blog.  So which is it?  Did you check it or not?  Clearly they lied about this one way or the other.  Therefore, I can conclude that these clients are liars. 

Feb 10, 2011 9:22 pm

Are you serious?  So they took the money OUT of CDs and then went to a BROKERAGE FIRM?  And you think these people's goal was "principal protection"?

Feb 10, 2011 9:50 pm

Sloppy recordkeeping doesn't make someone in breach of fiduciary duty.

Really? You keep trying to make this into a personal thing. This is all about record keeping.

I am not taking the side of the client. I'm saying, if the client delegates investment management, the client is always right until proved wrong.

Stop trying to build a narrative and face the facts. You are only proving the need for stricter record keeping, I appreciate the opportunity to learn from you and make myself more aware.

Because some people abuse trust for personal gain ( and probably most of us would be inclined to cover our butts when we had to) - this is all about strict record keeping and disclosure.

I'm going to admit that I'm not quite sure where you draw the line with acting as a fiduciary or not.  What I mean by that is that I know I'm not a fiduciary to my clients.  But how does charging them a fee vs a commission make my recommendations to my clients any better or worse?

That's the point, with proper disclosure and documenation, you could only be giving the client more choices or better service.

I don't see why or how you are not acting as fiduciary to your clients. For too long, we have allowed RIAs to hold the high road. This really pisses me off. Tired of the schmucks and the suits who defend them.

Feb 10, 2011 10:00 pm

More choices allows for LESS accountability. 

It IS personal.  This is our livelihood.  When people make false claims, it tarnishes ALL of our reputations.

Think of the woman who cries rape but it's later found out that her husband was out of town and she got pregnant and is unsure what the baby will look like. 

That guy's reputation is tarnished.

It is the same.  False claims or not well thought out claims tend to make our profession look bad. 

THAT is what pisses me off.  Not whether or not some guy who didn't document that the client called and was upset about the account. 

What if a 70 year old client says, "I want all equities.  I understand that I can lose all of my money, but historically they've outperformed."  You convince him to put a good portion in bonds.  When his equities tank, he says, "Time7 told me that I need equities to combat inflation.  I never signed that letter.  If I did, he just shoved it in with a bunch of other papers".  Did you breach your fiduciary duty?  Because you invested the assets according to the clients' wishes?

Being a fiduciary would not protect you from that. This is what clients do.  Times, I don't know how long you have been in the biz, but the majority of client claims are BS. 

Now, in the above case, having in depth documenting procedures will protect you, but most B/Ds don't have that level of documentation.  That acknowledgement letter is what they use to save their ass, but that doesn't work when there is anger against Wall Street.

I act in my clients' best interests at all times and am considered a fiduciary.  I wouldn't act any differently though whether I were REQUIRED to or not.  I want you to think of all of the restrictions on our profession and then apply them to ANY other profession.  We are MORE restricted than any other profession.

Feb 11, 2011 8:33 am

Daindee, I believe you make some good points - we feel the same way.

Having been in the biz a long time, I recognize your battle cred and hope we don't get regulated to pieces. As a solo shop, I'm proud to be RR and feel it is the place to be.

I generally agree, what is the point of having all of these licenses and compliance and experience if we can't operate mainly on trust? I am not a big fan of government, lawyers or big corporations. Especially lawyers.

We are heavily regulated, and I'll continue to do this as long as it's fun and profitable. then maybe I'll have to go teach golf in China.  I'm a broker, beotch.