Why Securities Brokerages Fear a Fiduciary Duty Standard

Since 1994, I have been privileged to represent hundreds of individual investors in securities disputes with their stock brokerage firms. I have witnessed first-hand the devastation and irreparable damage some stock brokers cause in their quest to earn as much income as possible for themselves and their brokerage firms. Often, the devastation is ignored and even encouraged by the securities industry through compensation programs and incentives that are designed for the benefit of the industry and to the detriment of the customer. In extreme cases, many securities industry insiders boast of their ability to “rip the client’s face off” as if this skill was truly something to be proud of. Perhaps former Goldman Sachs employee Greg Smith said it best in his resignation letter entitled “Why I Am Leaving Goldman Sachs.” Smith’s letter was printed in the March 14, 2012 edition of the Wall Street Journal. Smith described Goldman’s corporate culture as “the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.” Smith’s description is at odds with Goldman’s corporate slogan of “our client’s interests always come first.”

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The 2008 global economic melt-down and the ensuing Great Recession have led more and more investors to conclude that Wall Street simply cannot be trusted. Lost in the chaos of corporate greed is the fact that the securities industry cannot continue to exist without real assurances and meaningful action that it will stop ripping the faces off customers. We are a long way from the days of Morgan Stanley earning respect “one client at a time.”

In many other industries, when public relations disaster occurs, executives implement a comprehensive public relations campaign to stem the tide of bad press and shore up their industry credibility — all in an effort to earn back the respect and trust of their customers. A sincere public relations campaign, when implemented effectively, is often the only real solution to restoring trust and credibility. So why hasn’t Wall Street done the same?

Perhaps one reason Wall Street has not owned up to its abuses is illustrated in the findings of a recent poll among Wall Street personnel. In a July 10, 2012 survey, a quarter of Wall Street executives see wrongdoing as a key to success. In a survey of 500 senior executives in the United States and the UK, 26 percent of respondents said they had observed or had firsthand knowledge of wrongdoing in the workplace, while 24 percent said they believed financial services professionals may need to engage in unethical or illegal conduct to be successful. Sixteen percent of respondents said they would commit insider trading if they could get away with it. The survey also revealed that 30 percent said their compensation plans created pressure to compromise ethical standards or violate the law. The sad reality is crime does pay on Wall Street. The absence of meaningful regulation only serves to perpetuate this corporate dysfunction.

The survey also helps us understand the primary reason Wall Street does not want to change. Wall Street does not want to pay the price of change. That price is establishing a fiduciary duty standard in the industry.

A fiduciary duty in the securities industry requires that the brokerage act solely in the best interest of the customer, free of any self-dealing, conflicts of interest, or other abuse for the advantage of the brokerage. In simple terms, a fiduciary duty is simply doing what is best for the customer. A fiduciary duty standard would not allow brokerages to sell products to customers simply to generate more profit for the brokerage. A fiduciary duty would prohibit a brokerage from selling products to unsuspecting customers because the expected failure of those products would generate profits for the brokerages. A fiduciary duty would also require full and complete transparency in the methods of compensation paid to the brokerage.

All is not lost. Many financial advisors currently adhere to a fiduciary duty standard. Some financial advisors are affiliated with registered investment advisory firms. In this business model, the advisor is bound by a fiduciary duty and is legally required to do what is best for the customer. This business model exists and operates quite well. However, many of the well known securities firms are not registered investment advisory firms. Firms such as Merrill Lynch, JP Morgan Chase and Morgan Stanley operate as securities broker dealers and not as registered investment advisory firms. When pressed (typically when a dispute arises) these firms disavow any fiduciary duty owed to customers. These firms go to great lengths to avoid a fiduciary duty standard in defense of their actions. While advertising campaigns may promise that these firms will adhere “to a higher standard”; when a dispute arises, the firms will run for cover and disavow any fiduciary duty owed to any customer.

In California, all securities broker dealers are held to a fiduciary duty. Do not be fooled with disingenuous claims otherwise. A fiduciary duty standard is the only viable standard to restore trust in the industry. Ask yourself, what is Wall Street afraid of?

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