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Could Rule Change Stop Stockbroker Fraud?

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Washington, DCInvestors who feel they have been victims of stockbroker fraud can make their case in stockbroker arbitration, filed with the Financial Industry Regulator Authority (FINRA). But some critics of the stockbroker industry say stockbrokers should be subject to stricter rules concerning how they advise clients. As too many investors know, when a stockbroker’s advice is bad, lifesavings can be lost.

There are a variety of ways a stockbroker’s unethical actions can result in losses to an investor’s accounts. A stockbroker might not give an accurate warning about the true nature of the risk of an investment, or might push an investment with high commissions for himself, rather than worrying about what is in the best interests of his clients. Stockbrokers may be involved in churning, in which they attempt to increase their commissions by running a large number of transactions in an account.

Stockbrokers are currently under an obligation to recommend investments that are suitable for a client, based on that client’s financial situation and ability to withstand risk. But the US government is reportedly considering a rule that requires stockbrokers to put their clients’ interests ahead of their own. Such a rule would prohibit stockbrokers from putting their commissions ahead of the needs of the client, for example.

The stakes are apparently high. According to a report from the Council of Economic Advisers, brokers engaged in conflicts of interest could be costing their clients up to $17 billion a year.

“Investment losses due to conflicted advice result from the incentives conflicted payments generate for financial advisors to steer savers into products or investment strategies that provide larger payments to the adviser but are not necessarily the best choice for the saver,” the Council for Economic Advisors notes. Conflicted payments are those payments made “to the adviser that depend on actions taken by the advisee.” For example, a commission made on an investment purchase would be a conflicted payment. Some financial advisors work on commission while some charge an hourly rate or charge based on a percentage of the assets.

The proposed rule change would not only hold stockbrokers to a higher ethical standard, it would make it easier for clients to successfully argue an arbitration against their broker, increasing the chances they could recover their losses.


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