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By Expert ID: 5075, Ph.D., MSFP, LLB, MBA, BSCE

If you have ever been wronged by a broker, chances are you feel emotionally frustrated and financially abused, to say the least. There may be little you can initially do to rectify the situation since it is almost like water over the dam. Yes, there are procedures that you can utilize to initiate a process to help you get restitution, but the odds are stacked against you in getting all of your money back; even part of your money for that matter. Here is why; very, very few of the participants have a clue to the fundamentals of investing and the real life application of product thereof. And I mean all participants from the brokering entities to the arbitrators, attorneys, expert witnesses and more. It is not to suggest that significant awards are not/cannot be made, but my focus for this work is the issue of suitability and the fiduciary duty by an agent to make sure the investments and allocations are done correctly in context with risk at the time of engagement.

Therein lies the problem; risk and suitability/fiduciary duty have been esoteric and subjective issues.  While the law says a sale must be suitable, there is effectively nothing that says what that actually means. Mary Schapiro, head of the SEC and former head of FINRA said that the issue would be drawn out by the attorneys in a case. This is wrong; regulators are essentially clueless to suitability and so are their experts that come from the brokerage business. So are attorneys.

I will give you this main comment you will hear over and over again- if you do not understand diversification, you cannot understand risk. If you cannot understand risk, you cannot understand suitability. It may seem simplistic, but real life diversification is not taught to brokers, consumers, almost all experts and so on. The product allocations are not only therefore suspect, they may have no credulity at all. That is why the arbitrations addressing fiduciary standards, suitability and associated issues are flawed.

Further, most of the major entities that you think are looking out for consumer interests are actually doing exactly the opposite. Think SIFMA, FINRA, SEC, etc. They are predominantly staffed and run by attorneys. However attorneys, no matter their affiliation, rarely have a clue to the proper understanding of real life product application. There is no training on such with a law degree and there is dismal or no education on securities application from any state bar or private class.

Unlike many other disciplines (say a licensed barber or physician where the practitioner can always find the hair to work on or the heart to replace), financial planners/advisors do not have the same luxury of stability. The economy, products, risks, applications and more change radically over time and the advisor must be cognizant of the implications to a client. “Things” don’t stay in the same place. Look at the movement of interest rates from the 1980s down now to zero. We have had a bond bull market that might be over for a decade or more. Look at the stock market from 1990 to 2000 and the ten years thereafter. The point is that a broker does not have the background to correctly adjust to these drastic changes, no matter the years of touted experience (consider a witch doctor with 50 years of experience). It is NOT embedded in any instruction I have seen mainly because the fundamentals of investing have not made it to the private firms, universities or governmental regulators.

I do state that formal education at the highest level is necessary- which certainly would include the necessary insight to looking forward. That would be unique at best, since the advisors today almost universally look backwards as the primary, if not sole focus for determining what to say and do for a consumer.

In any case, you will conclude that there are no retail brokers left in United States. They and their firms have chosen a vast array of monikers projecting a high level of expertise. So be it. They then must be treated at the sophistication they infer. That is not suitability; it absolutely is as a fiduciary. Readers must walk away with an understanding that securities arbitrations are not fair because effectively no organization, private or public, is attempting the necessary instruction. In many ways, they cannot. They do not have the knowledge necessary, nor the instructors that can teach it.

As to the consumer’s financial literacy and sophistication; it will rarely exist. The ‘brokering’ entities providing advisory work have never been offered the fundamentals of investing. The industry cannot suggest a sophistication of those who consistently fail on any financial literacy test. It’s a simple position really; consumers are not required to know the definition of diversification. Brokers should know, however advisors must know.  So there is dichotomy between the two that is rarely addressed thoroughly or adequately in arbitrations. It should be.

This is not a diatribe; it is a presentation of facts that identifies to both plaintiffs and defendants the facts that need to be addressed via real life product application. The commentary, ideas, theories, statistics and more are covered in two video courses I have approved by the California State Bar for Continuing Legal Education:

Fiduciary Standards under Dodd Frank: Investments

Fiduciary Standards under Dodd Frank: Insurance and Annuities

These have no comparables for any other state, bar association or for any financial planning organization. Additionally, such issues are dealt extensively in Financial Planning Fiduciary Standards under Dodd Frank, and also in The Failure of Securities Arbitration, both published in 2012. 

By Expert ID: 5075, Ph.D., MSFP, LLB, MBA, BSCE