NEW YORK — Dual broker-adviser registration may become more common as brokerage firms shift from fee-based brokerage accounts, but the adviser’s new role could lead to more litigation, according to lawyers.
NEW YORK — Dual broker-adviser registration may become more common as brokerage firms shift from fee-based brokerage accounts, but the adviser’s new role could lead to more litigation, according to lawyers.
The problem, advisers and attorneys said, is that clients may not be entirely clear about what to expect from a dually registered professional.
“In our personal experience, [dual registration] has been a source of confusion for clients,” said Tom Orecchio, a principal with Greenbaum & Orecchio Inc. of Old Tappan, N.J., and chairman-elect of the National Association of Personal Financial Advisers in Arlington Heights, Ill. “We’ve seen two or three people just recently who didn’t understand that a firm can be dually registered.”
Investor confusion over investment professionals’ dual roles may rear its head if the stock market turns down, and clients seek to blame their advisers for investments that perform poorly, lawyers said.
“Customers will say that they were confused, and the brokers will say that they were selling a commission-based product,” said Terry R. Weiss, a partner in Sutherland Asbill & Brennan LLP, an Atlanta law firm. “Even with fiduciary duty, it’ll be confusing for an arbitration panel to hear.”
The possibility of more claims stemming from this confusion is not an issue only for investors but also for smaller broker-dealers, which can be jeopardized financially by costly litigation involving their reps.
“It’s the adviser’s obligation to give clients the knowledge and make sure they understand the investment risks,” said Jerry Rider, chief executive and chairman of the Las Vegas-based Financial Advisors Legal Association, which offers risk mitigation to advisers and brokers. “Well-documented advisers win arbitration claims. Clients can get selective memory when they’re trying to get their money back.”
Investors can pursue actions against dually registered advisers by filing sales complaints with NASD of Washington and, depending on state law, submitting money management complaints to the Securities and Exchange Commission or to the state in which the practice is based. NASD complaints can lead to arbitration.
In recent years, investors have been winning fewer arbitrations. The raw win rate for investors fell to 44% in 2004, from a high of 59% in 1999, according to “Mandatory Arbitration of Securities Disputes: A Statistical Analysis of How Claimants Fare,” a study by Edward S. O’Neal, formerly on the faculty of the Babcock Graduate School of Management at Wake Forest University in Winston-Salem, N.C., and Daniel R. Solin, a securities arbitration attorney.
The declining win rate is not necessarily a sign of anti-investor bias, said Mr. Rider, who noted that investors file many groundless claims that often lose or are dismissed. He did not participate in the study.
“People think that there must be something wrong, because investors aren’t getting their claims, but a majority of the claims we’ve encountered are baseless,” Mr. Rider added.
Not all industry professionals, however, believe that an increase in dual registration will bring with it additional claims. They believe that the addition of fiduciary responsibility will lead brokers to become more careful in their recommendations.
“One of the difficulties of the prior system was that the customers didn’t know if their professional was a broker, an adviser or a mix between the two,” said Stephen Caruso, president of the Public Investors Arbitration Bar Association in Norman, Okla. “Dual registration levels the playing field for brokers and advisers. Asserted claims will focus on conduct.”
Whether an investor wins or loses in court or arbitration, the real winners in the system are the lawyers, according to brokers.
“Even if a broker wins an arbitration claim, he’s heightened the awareness of the litigious environment around him,” said Douglas Schriner, president and chairman of Aurora, Colo.-based Harrison Douglas Financial Inc., a dually registered broker-dealer firm. “Other attorneys circle in the water, and the broker becomes subject to additional regulatory scrutiny.” In the worst scenario, tort attorneys will go after unhappy investors and target firms for settlements, Mr. Schriner added.
Smaller firms, such as Harrison Douglas, that would have a difficult time dealing with costly legal actions are coming up with their own ways to avoid litigation.
As more of its brokers become dually registered, the firm said, it will distribute documents to its reps, detailing their new duties, and to clients, explaining what they should expect. All clients will be required to sign off on agreements several times to make sure they know what they’re getting into, Mr. Schriner said. All registered reps at the firm will be required to become registered investment advisers, taking on fiduciary responsibilities.
“If that’s what the public thinks we are, then that’s what we should be,” Mr. Schriner said. “Educating the public [that brokers are different from advisers] is a massive undertaking, and we just don’t have the resources for that.”
