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Do You Need To Keep An Eye On Your Broker?

By Julie Jason, originally posted on Forbes.com.

Should you keep an eye on your broker? Let me share why that’s something to think about.

Picture this: You are a high-net-worth individual, an entrepreneur, who made a fortune by living the American dream. Your business grew exponentially, giving you substantial liquidity when you sold it.

Through a friend, you were introduced to a reliable broker to invest the proceeds of the sale. However, things did not work out. You lost confidence in the broker when you heard that your friend moved his account to another firm.

You started to review your accounts, finding many transactions that you were not aware of — lots of them. With some help, you calculated the commissions on those trades – they were massive. The state’s securities enforcement division investigated and found fraud. You recovered over $20 million.

This is slimmed-down version of a real case.

Could this series of events happen to you?

Firms Are Required to ‘Supervise’ Their Brokers

As a result of the enforcement action in the case above, the firm was required to add enhancements to its internal policies and procedures, by:

 a) “Designing and implementing a module that alerts supervisors to situations where certain clients generate a high level of revenues relative to the responsible [broker’s] overall compensation.”

b) “Instituting a process through which managers in branch offices initiate contact with the customers of that branch whose accounts generate the largest amounts of revenue even if there are no known concerns about those customer accounts.”

If you read these additional procedures carefully, you’ll see that the focus is revenues, as it should be. There is an ethical line, a legal line, that a broker should not cross with transaction-based commission income.

If you read the firm’s disclosures, you’ll see language about the financial incentives that can lead to increased numbers of transactions. For example, in its Best Interest Disclosure Statement, the firm acknowledged: “The more trades that you make in your account, the more we and your advisor get paid, giving us a financial incentive to encourage transactions in your account.”

It’s these types of disclosures that help a client get perspective on the motivation that can drive inappropriate behavior. Too many times, people believe that brokers’ actions don’t need to be double-checked. But, wouldn’t you have your bookkeeper’s work reviewed by a supervisor? Errors occur; they need to be caught. This has nothing to do with trust or lack of it. It has to do with two things: understanding the potential for 1) innocent errors and 2) in the case of brokers, incentives.

Who Oversees Excessive Transactions?

The responsibility to watch excessive revenues and excessive transactions is typically shouldered by the broker’s branch manager or other supervisory personnel. In this particular case, the firm had policies to police excessive trading. However, they did not catch this broker.

Some cynical attorneys who represent plaintiffs question whether that always happens, especially if a big producer is involved.

Commissions on transactions (buys and sells) generate revenues for the firm and payouts to brokers. Typically, the larger the “producer,” the higher the payouts. That is, big producers are paid more than others.

Investors Need to Keep An Eye On Trades

While the type of case we discussed is not the norm, one incident is too many if it’s your account that is mishandled.

Where does that leave you? Start here: Most brokers are honest, hardworking people. Most large brokerage firms, such as the one in this case, are highly tuned to supervision requirements and compliance. That does not mean, however, that cases such as this one do not occur. This particular broker also engaged in the same unlawful behavior with another customer, who recovered $40 million.

When you think about your own situation, decide whether it’s important to you to review trades, commissions and markups periodically. You need to notify the branch manager if you find a trade you did not authorize.

If you want to talk more about this subject, let me know. We could talk about how to review your brokerage statement, how to vet your broker or any other related topic.


To keep up with topics that I cover, be sure to follow me on the forbes.com site (and if you would like to subscribe, check out the red box at the top right). Write to me at forbes@juliejason.com. Include your city and state, and mention that you are a forbes.com reader. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future post.

 To read Julie Jason's books, go to: https://juliejason.com/books/julies-books.