by Brian Mahany
Stockbrokers do not have a fiduciary obligation to customers. At least not today. But they do have consider the best interests of their customers when making recommendations and they do have to make suitable recommendations. The line gets pretty fuzzy when stockbrokers have a conflict of interest – lining their pockets versus making you money. New rules would require stockbrokers to be more transparent about disclosing conflicts of interest.
What is a conflict of interest?
Having the issuer or investment house fund seminars or marketing materials is one example. It isn’t necessarily wrong but customers should know who is paying for the presentation. Are you getting independent investment advice from a broker or listening to a paid pitch? Most customers would want to know.
Funding due diligence is another questionable practice. The brokerage firm gets money from the promoter to fund due diligence – usually at a firm chosen by the issuer. This allows the stockbroker to claim that the investment was vetted and approved by a third party.
One of the worst practices are secret commissions or bonus payments. They often are called something different but the bottom line is that brokers are more prone to sell you something in which they are making a higher profit, even if the investment is questionable or not right for you.
These conflicts often occur with retirement products and non-traditional investments. Uncle Sam is not going to make secret deals with the local office of Edward Jones nor is Ford going to make deals with Merrill Lynch. But in large segments of the industry, conflicts abound.
While these undisclosed conflicts might not be illegal, they can be used as evidence if a broker makes an unsuitable investment recommendation for you. (The rules for investment advisers are much stricter; advisers have a clear fiduciary duty to their customers).
While no broker can guarantee an investment, best practices say that a stockbroker should disclose conflicts and should be independent in his or her recommendations. If you lost money and think the investment itself was unsuitable or think the broker acted solely to line his pockets, you may have a case and may be able to recover your losses.
Industry rules allow customers to arbitrate their disputes. Most cases are handled by the Financial Industry Regulatory Authority (FINRA) and are heard by a 3 person panel, two of the panel members being “public” as opposed to industry.
Contact a securities lawyer if you feel that you have lost money. At Mahany & Ertl, our stockbroker fraud lawyers can help you recover your money anywhere in the U.S. For more information contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at
Mahany & Ertl, LLC – America’s fraud lawyers. Offices in Milwaukee, Detroit, Portland & San Francisco. Services nationwide.