Brokerz from the Hood

“Make everybody see, in order to fight the powers that be.”  – Chuck D., Public Enemy

This quote from the rap group, Public Enemy, sums up the deception that is modus operandi of the majority of the financial service sector. While Chuck and his pals provided a release for the downtrodden and oppressed, retail brokerage clients face a different challenge.

Unlike Chuck’s easily identifiable nemeses (“straight out racists,” as he called them) the brokerage client must face wolves in sheep’s clothing.  These well-spoken and impeccably dressed miscreants often use deceptive and misleading practices that lurk on the fringe of illegality.

In a brilliant article by Michael Grunwald of Politico, these deceptions are shattered to pieces. Sunlight is known to be the best disinfectant, and many of Grunwald’s findings shine the light on some of the most egregious examples of misleading advertising.

Brokerage firms look at the fiduciary rule created by the Department of Labor and supported by President Obama as their “Alamo.” They feel this rule which would force them to look out for their clients best interests would effectively destroy their immensely profitable commission based business models. They are willing to fight to the death to block its passage.

Their trade groups led by SIFMA are putting out all the stops. “They’re passionately committed to the best interests of their clients, as long as they’re not legally required to serve the best interests of their clients.”  This quote by Barbara Roper, director of investor protection for the Consumer Federation of America, sums up their strategy.

This attitude is clearly displayed in both the brokerages T.V. ads and their legal responses to clients who take them to arbitration. While they say one thing, their actions  clearly state where their interests lie. Their actions are anything but “investor friendly.”

Edward Jones runs ads espousing “straight talk” and “making sense of investing.” Their clarification of “straight talk” can be defined as receiving tens of millions of dollars from preferred mutual funds on top of commissions which they did not disclose to their clients. For this “honesty” they paid $75 million in fines to the S.E.C.; recently, they were fined $20 million for cheating clients on municipal bond trades. I am not sure if these actions “make sense” to their clients, but they sure do to their salespeople.

Not be outdone, Mellon Bank’s wealth management division stresses in its ads that it is “a different kind of wealth manager.” In their world” different” would be classified as being fined $714 million for cheating its foreign exchange customers. These clients included pension funds that mange money for teacher, firefighter, and police retirement accounts.

Wells Fargo and UBS took another track. Keeping up with their “west side is the best side image,” Wells Fargo’s ads state, “Your best interests are the top priority.” UBS chimes in with “Until my client knows she comes first…we will not rest.” When clients challenged them in arbitration for deceptive practices, they both responded in a very different manner.  “The law establishes that a broker does not have a fiduciary duty to a customer with respect to a non-discretionary account.” 

This is like what Kevin Mitchell said about ‘The new born again” Daryl Strawberry of the 1986 NY Mets. When asked what he thought of Daryl’s transformed Boy Scout behavior, he responded, “I guess the weekends don’t count!”

Moving on, Ameriprise Financial employs the straight talking Tommy Lee Jones in its ads, saying things like “Our advisors are ethically obligated to act with your best interests at heart.” While in FINRA hearings this paternal tone took a 360 degree Linda Blair Exorcist head turn. I don’t recall Tommy Lee saying “We have no fiduciary duties to claimants.”

FINRA is the “self-regulator” that polices brokers. Investors turn to FINRA to arbitrate disputes since most brokers make their clients sign agreements that say they cannot take them to court. One could question this structure which relies on the brokerage to fund its operations. It could be considered one of the “powers that be.”

Retail investors need their own version of Public Enemy to “bum rush the show” and expose this hypocrisy in no uncertain terms. If this doesn’t happen retail brokerage clients would be wise to heed the words of Chuck D. in his heavy bass voice in their classic anthem “Fight the Power.”

“People, people we are the same

No we’re not the same

Cause we don’t know the game

What we need is awareness, we can’t get careless.” 

Many retail clients are not treated the same and most have no idea. They think their broker is legally bound to act in their best interests. That is dead wrong. Retail investors don’t know the rules of the game and pay a hefty price. It has been estimated by the Department of Labor that this ignorance costs about $17 billion a year in needless fees and commissions.

Wake up and question your advisor about his fee structure. If his answer to the question “Are you a fiduciary?” is anything beyond a straight-up yes, get a new advisor. Don’t be careless; strengthen your awareness. Though there are deep-pocketed special interests trying to thwart you, it is possible to fight the power and win.


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