FINRA Punishes Good Advisors Along With the Bad Ones

A recent Wall Street Journal article reported that more than 1,600 advisors who declared personal bankruptcy or faced criminal charges had failed to notify FINRA and the firms for which they worked. And, the article noted, those advisors had more client complaints and regulatory actions on their records than their solvent colleagues who had never been charged with a crime.

As someone who has followed the wealth management industry for many years (back to the days when it was called “retail brokerage”), it comes as no surprise that those whom the public trusts to manage its money are often terrible at managing their own.

In the 1990s, Merrill Lynch had a deferred stock award program called FCAAP. Advisors who met certain productivity criteria during the year were awarded Merrill Lynch stock. The award was still taxable income, so advisors who were given, for example, $100,000 in MER were required to have $35,000 withheld to pay taxes. Yet even though they knew the awards were coming, these advisors often had to sell other securities in order to come up with the cash to pay the taxman. Not exactly textbook financial planning.

Similarly, during the Sandy Weil era, Smith Barney advisors were encouraged to invest their own money in Citi stock. Employees were allowed to defer a portion of their income and use the money to buy Citi at a 25% discount. For years, this “CAP” plan was a remarkable retention and recruiting tool, and branch managers, who were incented by Citi to have their advisors participate in the plan, each year would require them to put 10% of their income into CAP.

Yet many Smith Barney advisors often begged to be released from the program. Even though buying a blue chip stock at a 25% discount with as much pre-tax earnings as possible was the ultimate financial “no-brainer,” the firm’s advisors often failed to take advantage of the program, because they were tapped out. Again, not exactly textbook financial planning.

Back then, advisors with Smith Barney and Merrill Lynch were regarded as the most well-trained, most professional, and working for firms with the strongest cultures. But even those advisors often lived above their means, suffered through financially draining divorces and, perhaps at times, engaged in legally questionable behavior.

I bring all this up by way of acknowledging that many advisors—like many doctors and lawyers—are less than perfect. Some of them are truly bad advisors, only interested in their own well-being at the expense of their clients.

But my experience during 30 years as a recruiter in this industry teaches me that the vast majority of advisors care passionately about their clients and take their responsibility for their clients’ financial well-being very seriously. So while the Journal headline screams about how crooked, broke advisors are allowed to continue working, I also think it’s fair to examine how FINRA, and the industry in general, tars those advisors who uphold the law and act responsibly with the same brush.

Under the current regulatory regime:

1. An advisor is guilty until proven innocent, and the accusations stay on his or her record forever.

Absurd accusations, though denied; any written complaint, no matter how unfounded or trivial, appear indefinitely on the advisor’s publicly available BrokerCheck record. It is possible for brokerage firms to have those complaints expunged, if they were willing to expend the time, money and effort to do so, but that almost never happens.

2. Brokerage firms will settle groundless complaints in order to avoid the expense of litigation, even though doing so becomes a permanent smear on an advisor’s record.

An unhappy client writes a complaint alleging unauthorized trading, unsuitable recommendations and churning (the unholy triad of non-compliance). The advisor provides his firm with notes of meetings and conversations with the client, including phone records proving that they spoke frequently about the investment in question and its impact on the client’s portfolio. He also shows his management the client’s financial plan, which supports his contentions.

The advisor wants to go to arbitration to show the world that he did nothing wrong. Yet even though the firm believes him, it insists on settling for $100,000 because it wants to avoid the cost of further litigation and the risk that arbitrators will view the matter differently. This customer complaint shows up on the advisor’s cover page on BrokerCheck as “Customer Complaint – 1.”  Details of the complaint and the “business” reasons for settling it are only seen if a curious party takes the time to open up the accompanying PDF.

3. Contingency torts attorneys aggressively market their services to investors as a way to recoup investment losses.

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Comments (8)
Good article, although I think the author could have used a different choice of words to described ethical financial advisors vs. non-ethical advisors, instead of saying, "Black hats vs. "White hats."
Posted by Martin A. S | Monday, May 05 2014 at 8:45AM ET
FINRA is so consumed by the desire to expand its burgeoning empire that it cannot be bothered with matters as trivial as being fair or even-handed. Becoming bigger and more powerful, the agency's constant and highest priority, overrides any concerns about dealing with issues that call for basic common sense.
Posted by Ron E | Monday, May 05 2014 at 10:37AM ET
Good article to let the general public what FINRA does to good brokers.
I stopped my registration in 2010. And can not be more happier except for the fact I stll have to explain the complaint I had in 1997. It seems although I no longer in the industry. Non industry employers check registration history as well.Can't win.

Posted by Nelson G | Monday, May 05 2014 at 11:28AM ET
We urge the writer of this article, Mr. Sarch, to come up with a couple of "action points" that could be adopted as policy, and try to get FINRA to adopt them. They might be willing to take a look. In addition to complaining, you have to put your alternative action points forward and push them forward.

Compliance issues are a challenge in the industry. Both legitimate and illegitimate complaints are rained down on the industry's firms.

For our part, for years now, we have been asking that the bulge bracket firms comply with the SEC's "CCO Reg" or Chief Compliance Officer reg, which simply says that the firms (who do business as investment advisors) must appoint a "Chief Investment Officer", and almost all of them refuse to do so (except Citibank, who does comply).

But Morgan Stanley, JPMorganChase, Bank of America, Prudential Insurance, MetLife, UBS, Wells Fargo, Goldman Sachs, Credit Suisse, and the list could go on - they refuse to comply. And this is a problem - because it is a reflection on the part of their senior management that because they can afford fancy lawyers, the law does not apply to them. We have complained about it over and over again in the media - and they literally don't care. And even more troubling, with all the times we have written about it in the press in various comment boxes like this - not one person in the entire world has voiced support for our position that this is important - because it shows the offending firms' arrogant law-breaking attitude. Not one person has chimed in to say - "hey, why are these giant firms not complying ? ... this is ridiculous". Not one person has supported our many published comments on this and it is years now. Not one industry professional, and not one regulator.

And you wonder why are there problems in the compliance area of finance. When people act like they don't give a hoot about something - or that (with their expensive lawyers) they intend to not comply as some kind of buckaneering badge of honor, to show that justice in American finance is not something based on law or ethics, but rather it is bought and sold in soundproofed law firm conference rooms by expensive lawyers and jaundiced judges ... when you act like you don't care about it, everyone will think you don't care about it - or that, as with the CCO Reg issue, the goal is an improper one, to flout the law to reflect the "power" of management. The "power" to flout the law. Hmm, and these people still have their jobs ?

Well, all we can say is "thank you Citibank" for complying. Not for the sake of slavishly following a needless or over-detailed regulation, but for adhering to a reg that was designed to be a backbone of the industry and to say to the public, yes - we actually do care about right and wrong. And to every one of the flouter firms and to their CEO's, chairmen, and board members who allow their firms to flout the CCO reg - your securities licenses should be pulled, and maybe one day they will be, and then you could really spend some more time with the expensive lawyers who you love so much.

Matt Lechner
Chairman - WSSIG, the Wall Street Special Interest Group "supporting and growing America's interests in the global capital markets"
Posted by Matt L | Monday, May 05 2014 at 2:28PM ET
sorry - typo "they must appoint a Chief Compliance Officer"
Posted by Matt L | Monday, May 05 2014 at 2:32PM ET
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