Finger Cross

Bad Brokers

Finger Cross
Fiduciary: one often in a position of authority who obligates himself or herself to act on behalf of another and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation.

-- As defined by Merriam-Webster

In the past, we've chronicled cases of misdeeds by brokers working with investors in the U.S. as well as around the world. These abuses have come despite a push by regulators to raise legal standards for how brokers work with investors.

A development that's made headlines more recently involved a particularly well-known name in global banking and financial services: Merrill Lynch, which is a division of Bank of America.  

The Financial Industry Regulatory Authority, commonly referred to by its FINRA acronym, has ordered Merrill Lynch to pay more than $7.2 million in restitution and interest to investors who bought mutual funds from the wirehouse. FINRA is a self-regulatory organization (SRO) made up of the very member firms it regulates. It's overseen by the Securities and Exchange Commission and serves as the primary regulator for broker-dealers. 

The charges involved 13,000-plus Merrill Lynch accounts and involved clients who "incurred unnecessary sales charges and paid excess fees in connection with mutual fund transactions," according to Finra. These practices continued over a six-year period, the regulator related, and involved front-end sales charges and failure to provide clients with proper waivers of fees for buying mutual funds. 

Of course, brokers behaving badly isn't a new story. The Merrill Lynch case came after Morgan Stanley had agreed to pay a $5 million penalty to the SEC on charges it provided "misleading" information to clients. The penalty amount was set to be distributed to "harmed investors," the regulatory agency noted in a statement announcing such actions.

The SEC added that violations took place in Morgan Stanley's retail wrap fee programs and involved issues related to trade execution services and transaction costs charged to clients by the brokerage. Wrap fee programs offer accounts in which clients pay an asset-based "wrap fee" that can include everything from fund selection and brokerage services to trade execution. Morgan Stanley marketed those programs with a "transparent" fee structure, according to the SEC. 

During a five-year period, some of the brokerage's marketing and client communications "gave the impression that wrap fee clients were not likely to incur additional trade execution costs," the SEC added. But regulators found that Morgan Stanley "routinely" farmed out such duties to "third-party" broker-dealers that in some cases resulted in "clients paying additional transaction fees that were not visible to them." 

Brokerages might brush off accounts of such tawdry behavior as happenstance. In fact, InvestmentNews reported that before being slapped by the SEC over its wrap programs, Morgan Stanley had gone to a federal court in Florida to appeal a $3.3 million Finra arbitration award in connection with "battered and beleaguered" Puerto Rican bonds sold to investors. It lost such an appeal, the trade publication noted in an article about the issue. ("Morgan Stanley Loses Appeal of $3.3 million Finra arbitration," April 13, 2020.) 

Unfriendly behavior towards investors keeps cropping up at other big brokerages. Some more examples include:

  • A New York federal court has decided to combine a trio of different class actions suits against JPMorgan Chase, according to InvestmentNews. The suits allege that about 300,000 participants in its 401(k) plan were "ill-served by plan fiduciaries," the publication reports. ["3 suits against JPMorgan Chase's 401(k) Plan are joined," April 9, 2020.] 
  • A federal judge has denied a motion by Raymond James to vacate a $1.8 million arbitration award, per InvestmentNews. The case involved sales of penny stocks to elderly investors, the magazine reported. ("Court Denies Raymond James' motion to vacate $1.8 million arbitration award," April 9, 2020.) 
  • Finra has ordered Stifel, Nicolaus & Co. to pay some $1.9 million in restitution (plus interest) to more than 1,700 clients. The charges involve timing of rollovers to Unit Investment Trusts. A UIT offers investors shares, or "units," in a fixed portfolio of securities in a one-time public offering that terminates on a specific maturity date. UITs generally are intended as long-term investments and have sales charges based on their long-term nature, including an initial and deferred sales charge and a creation and development fee. "A registered representative who recommends that a customer sell his or her UIT position before the maturity date and then 'rolls over' those funds into a new UIT causes the customer to incur increased sale charges over time, raising suitability concerns," the regulator noted in releasing its order. 

While courts and regulatory bodies continue to try to rectify wrongdoings by brokers, such actions no doubt come as only partial consolation to thousands of investors who thought they were paying for advice given to safeguard their best interests, not those of their respective brokers.

Enforcement actions like these not only raise red flags about shenanigans of broker-dealers. Such recurring headlines also highlight how differently brokers work compared to fee-based Registered Investment Advisors (RIAs). 

At IFA, which is registered as an independently owned and managed financial advisory firm, we're required to act as fiduciaries. As a result, IFA's advisors must act in the best interest of their clients -- even if doing so goes against the best interest of IFA as a business.

But good intent is just part of the story. To wear our fiduciary badge with honor in today's investing landscape, we apply an academic rigor that takes advantage of passively managed mutual funds and exchange-traded funds. A wealth of research gives us confidence that index funds provide our clients the best chance at achieving the highest expected long-term returns net of fees.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, service, or considered to be tax advice. There are no guarantees investment strategies will be successful.  Investing involves risks, including possible loss of principal. For more information about Index Fund Advisors, Inc., please review our brochure at or visit