NAPLES, Fla., Jan. 22, 2011 (GLOBE NEWSWIRE) -- The investor rights law firm of Vernon Healy expressed praise for Friday's late SEC recommendation to Congress on needed reform to hold stockbrokers and registered investment advisors to a uniform fiduciary duty to their clients.
"It troubles me that it took the devastating losses that retail investors had to suffer over the last several years during the economic crisis for these changes to come about, but regulators are finally stepping up to fix this glaring problem," said Chris Vernon, investor rights attorney and founding partner of the Vernon Healy law firm.
Most investors mistakenly think that stockbrokers or financial consultants have a fiduciary duty to put their clients' interests ahead of their own. However, they aren't held to a fiduciary duty like that required of registered investment advisors under the existing rules.
Stockbrokers, holding themselves out as trusted financial professionals, frequently have conflicts of interest and are often paid high commissions and fees to sell "house" products to unsuspecting investors who think they are getting independent financial advice. In recent years, these "house" products have included principal protected notes, reverse convertibles, private equity funds, hedge funds, and other investment products that are created and packaged by the brokerage firms.
A competent and independent investment advisor who is untainted by conflicts of interest, would likely avoid many of these brokerage house products. For example, many "structured products" such as principal protected notes and reverse convertibles that brokers and brokerage firms recommend are actually unsecured loans from the investor to the brokerage firm under terms a traditional bank would reject.
According to one survey, more than two thirds of the investors in the United States have the mistaken belief that stockbrokers hold themselves to the same fiduciary standards – including a commitment to always put the interests of the client first – as registered investment advisors.
Another survey by InfoGroup/ ORC shows that a nearly unanimous 97 percent of people agree that "when you receive investment advice from a financial professional, the person providing the advice should put your interests ahead of theirs and should have to tell you upfront about any fees or commissions they earn and any conflicts of interest that potentially could influence that advice."
"Unfortunately, brokerage firms such as UBS, Ameriprise, LPL, Raymond James, Morgan Stanley, Merrill Lynch, and others often claim that their financial consultants are only required to stay within the client account's 'suitability requirements' – a lesser standard that only requires the broker to determine that the product being pitched is "suitable" for the client," Vernon said.
"This is akin to having your attorney or physician recommend an option that is suitable for you, without regard as to whether it is the best way to proceed among multiple suitable options. In this scenario — as argued by brokerage firms — the stockbroker is free to choose the suitable option that is most lucrative and/or easiest for the stockbroker," Vernon added.
FINRA, the private self-regulatory organization funded entirely by the securities industry, acknowledged that a fiduciary standard should be instituted for brokerage firms and licensed stockbrokers in its 2009 FINRA Year End Report. Likewise, SEC Chairman Mary Schapiro voiced support for a uniform fiduciary standard in a July 2010 speech at the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.
"It's good to see the regulators aren't backing off the position they took during the heat of the economic crisis," Vernon said.
Christopher Vernon is a Naples-based attorney with the law firm Vernon Healy. He advocates for the rights of investors throughout the United States and abroad—both in and out of the courtroom and arbitration hearing room. Mr. Vernon currently holds an AV rating by Martindale-Hubbell, has been repeatedly recognized by his peers in The Best Lawyers in America and has also been consistently recognized in the Florida editions of the Super Lawyers publication. Mr. Vernon has spoken at both national securities and national trial attorney conventions and has also conducted continuing education in the U.S. and abroad for CPAs, CFAs, CFPs, investment professionals, board certified business litigation lawyers, board certified trust and estate lawyers, and securities regulators. Mr. Vernon has also testified as an expert on issues relating to FINRA arbitration.