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10 ways your broker can pick your pocket
Megan Johnston, Forbes | August 10, 2006
Check out any television advertisement for a full-service brokerage firm, and the same words tend to pop up: trust, integrity, relationships.
Last year, Morgan Stanley ran ads that depicted a broker cheering wildly on the sidelines of a soccer game -- that of his client's kid.
But look for the fine print on any full-service brokerage's Web site and you'll see the following: "Our interests may not be the same as yours." That's because, when it comes right down to it, brokers are salespeople.
There's the rub. Some brokers may try to pitch you products that will earn them higher commissions. "They aren't committing fraud, but it's not necessarily good advice for the investor, either," says Barbara Black, who previously founded the Securities Arbitration Clinic at Pace University School of Law and now is the director of the Corporate Law Center at the University of Cincinnati.
Case in point: After Marcia Lockwood's husband died, a Morgan broker managing the family trust convinced her to stash it in -- no surprise here -- Morgan mutual funds. The broker chose Class B shares, which carry higher expenses (an additional 0.86% each year) than the Class A shares, but don't have the upfront sales charge of the A shares.
Lockwood had her pocket picked. What the broker didn't tell her was that it would clearly have been better for her to buy the A shares. That's because she was investing $570,000, enough to take advantage of the sliding scale offered on Morgan load funds: Her upfront commission would have only been 2%.
Lockwood joined a class-action suit against Morgan Stanley, contending that she didn't get a full explanation of share classes when she became trustee of her deceased husband's trust in 1994.
Morgan Stanley got the case dismissed on the grounds that the share-class information was in the prospectus, and Lockwood chose not to take the case to arbitration.
Arbitration is how disgruntled investors usually have to bring their complaints against brokers. In 2005, 6,074 cases were filed, the majority of which dealt with breach of fiduciary duty and negligence. Last year, only 43% of claimants were awarded damages.
It doesn't usually reap a quick reward, either. According to the National Association of Securities Dealers, the average case takes 13.7 months from start to finish.
Before getting involved with a broker, check his track record. You can do that by using the BrokerCheck function on the National Association of Securities Dealers' Web site www.nasd.com (http://www.nasd.com/>), which will disclose your broker's employment experience, as well as any criminal events or regulatory actions taken against him.
There is more than one way that can happen. As well as steering you into a more expensive class of funds, they may be steering you into the wrong fund family -- their own brokerage house's, which may not be the cheapest or best performing.
Or they could be overlooking sales discounts you could get, or put you into an actively managed fund when you want a long-term investment. That racks up the fees for them, and guess who is paying?