THE HAYES LAW FIRM, www.dhayeslaw.com
Interviewer: What is broker misconduct?
Debra Hayes: Broker misconduct can range from someone, a broker, stealing your money -- which, frankly, there is so much regulation that this really doesn't happen very often these days -- to a broker making an unsuitable recommendation to you. For instances, a broker recommends that a person over the age of 55 buy a variable annuity. That's an unsuitable product; there are huge surrender charges if you ever try to get out of it. You're paying for the most expensive life insurance product that's wrapped into this variable annuity that you could ever pay. That's an unsuitable recommendation; that's broker misconduct.
A broker who runs a hypothetical illustration, and makes assumptions in that hypothetical illustration that are not reasonable, showing that your retirement monies are going to last you throughout your life, that's broker misconduct. Putting an IRA account inside a variable annuity, that's broker misconduct. In addition, broker misconduct would be filing out forms in a fraudulent manner or saying that a retiree who's most concerned about income is an aggressive growth investor.
Broker misconduct comes in many, many forms. Unfortunately, clients don't know about it until they lose money as a result.
Interviewer: Is this true for individual brokers or just for brokerage houses?
Debra Hayes: It varies. Many times the individual broker is the one making decisions. However, what he does, the action he takes, is supposedly and allegedly supervised by the branch manager in those offices. Many times our claims involve failure of the branch managers to supervise what's going on.
Sometimes, these branch managers and compliance managers get reports on their desk that -- they call them exception reports -- that are telling them, "Mr. Smith is over here losing 50% and 60% of his money and no action is taken." So, obviously there's supervisory and compliance issues that are not being followed by these firms.
Also, there is misconduct by the actual brokerage firm -- something that we call "making a market" in a stock. In other words, the financing part of Merrill Lynch is financing this stock and earning money. So, they're promoting this stock, they're encouraging their brokers to sell this stock to their clients so that they make money on it in every way that we can. Not because it's necessarily a good stock, not because it's a suitable security or stock for that client, but because they can make money on every side of the deal. So sometimes the misconduct is at a higher level.
There are other instances. Edward Jones is in the middle of a class action settlement for taking kickbacks from the mutual funds. When you walked into Edward Jones, there were eight mutual funds and every single client I've ever had has had one of those same eight mutual funds. Well, that's because Edward Jones was getting kickbacks on those mutual funds.
So sometimes it's at the high level where the brokerage firm is putting a "daily special list" out there to the brokers and saying, "Here's what's on the daily special, sell it to your clients." Sometimes it's at the midlevel management where the supervisor isn't doing his or her job. Other times it's at the individual broker level where they're not acting in the best interest of the client, which is what they are ordered to do by the securities regulations.
Interviewer: How can an investor recognize if they've been a victim of this type of misconduct?
Debra Hayes: Again, the misconduct is typically going to show up in the losses; the clients are going to lose money because this broker has not acted in their best interest and has taken action that's actually harmful to them. So, it could be that they're not getting a proper return. For instance, in this very high stock market, if you're sitting there and you're not making a 10% to 12% return, there could be broker misconduct. Many times when the market falls, like it did in 2001, that's when so many people get hurt because they weren't adequately protected; the market crashes, the brokers sit there and let the accounts fall and people can't ever recover from those kinds of losses.
Again, it may be the type of product that they have and many times people don't even know what they have. So, people need to inquire with their current broker, "What exactly do I have?" They need to understand what they have and then they need to seek out, either do some of their own research or seek out competent counsel to determine that and the manner in which they're invested is suitable for their situation.
Interviewer: Is there a more typical type of victim of this type of misconduct?
Debra Hayes: It's typically the elderly, those that are retiring or are retired. In this day and time, many, many people are retiring at the age of 55 and that's not what we would normally think of as elderly. However, I would say that the victims tend to be from age 55 and up. It's across the board. We see very educated people taken advantage of because they rely on the broker's recommendations. Of course, those that are not highly educated are victims of these types of conduct as well. The common sentiment is that people hire a broker that they trust and then they rely on them and accept their recommendations.
Many employees that are retiring meet with a broker that their company chooses. They're very trusting in that type of a situation and think, "Oh well, my company let this person speak to us, they must know that they're a good person. They must know what they're talking about."
These brokers are extremely good salesmen, which is what they are, salesmen. They really are not financial analyst, in my opinion, but they claim they are. So again, those that fall victim to that the most often are 55 and over, retirees and elderly people.
Interview: You've recommended seeking counsel if you think there is a problem with an investment you've made and this type of misconduct as something a victim should do. Is there anything else they should do and things they shouldn't do?
Debra Hayes: Number one, they need to absolutely understand what the product is they're in and what the fees and expenses are that are going into that product. For instance, you might be getting a lovely 8% or 9% return, but if you're in a product that's costing you 3%, you're only earning 5% or 6% and so you really aren't earning what other people in the market are. You've got to ask very detailed questions and understand what you're getting into and hold your broker accountable.
You can also always go and visit with a competitor, go to another broker at another firm and have them give you an opinion. Although, quite frankly, you're just probably going to get an opinion about them wanting to put you into whatever their hot product is.
There are insurance agencies and securities agencies in every state. Your could contact for instance, the Texas Securities Board or the Alabama Securities Board. Those entities differ by each state as to how aggressive they are. For instance, Joe Borg in Alabama is very aggressive and he will investigate any claims of abuse that anyone would bring to his attention. I'm not as familiar with every other state, but some states are very good about investigating, so that is another route that people could take.
Interview: Are there things they shouldn't do?
Debra Hayes: They should not accept these recommendations carte blanche. They should discuss it with other family members, other brokers, perhaps an attorney, perhaps their accountant -- that's another source of information that they can go to.
They should not believe that they will get something for nothing. In other words, if you are told that you are going to get the highest return, then you need to understand that you're taking the highest risk. Nothing comes for free, even in the stock market. If you are getting the highest return, you're taking a tremendous amount of risk and you need to be honest with yourself about that.
You should be very wary, in my opinion, of any portfolio that involves being invested 100% in the stock market. I think that every person, especially this group we're talking about which are retiring or retirees, need to have well-balanced portfolios and that means a mix of bonds and stocks, as well.
If you believe your broker has defrauded you, please contact THE HAYES LAW FIRM at 1-866-332-3567 and visit our web site at www.dhayeslaw.com
Send an email to Debra Hayes at dhayes@dhayeslaw.com
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