[Editor's Note: This is a guest post from Matthew Kaiser, JD, an attorney and a blogger. He is a founding partner of a Washington, DC law firm and an adjunct professor of law at Georgetown University. We have no financial relationship.]
Matthew Kaiser, JD
There are unscrupulous brokers in the world. Everyone knows that. Thankfully, most brokers aren’t going to rip you off, but some will. Here’s how to think about it if you think it may be happening to you.
Doctors Have A Target On Their Back From the Financial Industry
There are a few reasons why doctors may be at a higher risk of being ripped off by a broker than the average investor.
First, physicians do not get investment training in med school – they aren’t professional money managers. While there are some great resources out there, like this blog, they aren’t the same as a vast body of training and experience.
Second, doctors make a good amount of money. If unscrupulous brokers are sharks, high earning professionals are chum in the water. To a shady broker, the average doctor smells like chum, especially since brokers know this important fact about doctors – that they are experts in the health care world, but not necessarily in the finance world.
Third – and this one is a little delicate – doctors can be a little cocky. Yes, and lawyers are too! But we're talking about doctors for our purposes today. There are some doctors out there, perhaps you’ve met one at a conference, who think that they know better than other people because they get to wear a white coat to work. The flip side to this is that some people who are accustomed to looking smart, really don’t want to look stupid. This means they sometimes don’t ask the questions that they should, assuming that things are working out for the best. To keep with the metaphor, if crooked brokers are sharks, this means that the doctor they’re feasting on is under anesthesia.
Fourth, doctors expect to do better than average with their investors, often much better than average. Physicians are accustomed to being the smartest person in the room and assume that the highest return should go to the smartest person in the room. Brokers who are honest normally don’t promise extraordinarily high returns. Brokers who want to rip you off just might, and even very smart people can fall for an aggressive sales pitch promising outrageous returns. So, its important to know how things might go bad.
How A Broker Can Take Advantage Of Doctors
Brokers can unscrupulously take money from their clients in a number of ways. One of the most common ways is “churning” an account – where a broker will make a series of unnecessary trades that don’t make any sense in order to increase the commissions that they will be paid. Other times, brokers may engage in self-dealing, putting you into investments where they get a cut, above and beyond the commission you knew you were paying them for the transaction. If your account statement shows a large number of unexpected trades or investments that just don’t make sense, you need to pay attention.
How To Fight Back
If you think your broker may have taken advantage of you, the first thing you should do is get your documents together. Many investors hire a lawyer at that point. The lawyer can gather all electronic and paper documents and present them to your broker to try to secure a settlement. Ideally, your attorney can look at your trading records and other documents, identify what went wrong, and convince the other side to make you whole.
If that fails, the attorney can take the case to the appropriate body, usually an arbitration panel, and work to get what you deserve. A lawyer who is prepared to bring a fight can frame a demand for the broker to make things right in a way that will have the best chance that they'll respond to it. If they won't settle on terms that work for you, you'll have to fight it out. You're very likely to do that in a FINancial Industry Regulatory Authority (FINRA) arbitration. FINRA sets up an arbitration process that is supposed to be faster and cheaper than a normal lawsuit. They try to have the case heard by the arbitration panel within nine months of when they have an initial scheduling meeting. So, once you file, you're still around a year away from getting what you want from your broker. While that seems like a long time, it's still faster than a civil case, which can take years.
A FINRA arbitration generally goes to a panel of three people. FINRA gets criticized for being too broker friendly but whether that's fair or not, you'll have a chance to work with your lawyer to choose who is on the arbitration panel. Your attorney may know that someone is too cozy to investment professionals, and can work to keep them off the panel.
These cases can be expensive. Generally, it only makes sense to bring a claim against a broker if the losses are significant – at least more than $100,000. If your claim is for less than that, you may want to try to handle it yourself; hiring a lawyer may not be worth the cost.
When you give an investment professional your money, you are trusting them. You're trusting that they'll act in your best interest and that you won't be taken advantage of. Unfortunately, that trust isn't always rewarded.
[Editor's Note: One of the easiest ways to avoid getting ripped off by a broker is to avoid using one. Picking stocks is in general a loser's game, and most investors ought to be using low-cost passively managed mutual funds to invest in stocks and bonds. If you lack the expertise to assemble and maintain a portfolio of funds, hire a fee-only adviser who will act as a fiduciary. While you can still sue a fee-only advisor for bad advice, you're much less likely to need to.]
What do you think? Have you gone after a bad broker or adviser? How did it turn out? Comment below!
If I’m not mistaken it was discussed at bogleheads that those members on arbitration panels who have voted for clients have been dismissed from being on additional panels.
Understanding a broker or advisor’s financial motivation (pay structure) can make the relationship more transparent and weed out some of the crooks. Fees vs commissions vs both.
My wife got ripped by the Ponzi run by Angelo Alleca. He fooled the investment officers and accountant at Summit Wealth as well as the trusting customers. To add insult to injury, after Alecca admitted guilt, the SEC appointed a receiver to handle the case. The structure is such that the receiver gets paid first and has little incentive to recover more than that. He controls all communication about the case, and the victims are not revealed to each other. Oddly, Alleca had two homes and a thriving business in multiple states with over 200 clients, yet the receiver reports that Alleca has no assets with which to repair his victims. The warning to beware is appropriate, but when experienced professionals get suckered, the individual investor has little chance. Further, with the current regulatory structure, his loss is just about guaranteed.
Contact me about this. He scammed me too. Mike
Quite unfortunately, I too was a victim of the Angelo Alleca scam G.T and yes the Receivership arrangement is unsettling to me because we, as victims, are not provided much in terms of information. That said, I have spoken with another Receiver and learned that it typically takes years gain something back for violated investors, like your wife and I. Cleaning up after Alleca’s Ponzi – the Receiver will likely need to file various legal suits against people and firms that worked with Summit (along with there insurance companies hopefully) probably winning a few and losing a few – but on balance we may get something back after the dust settles and all the Attorneys are finally paid off. The Court report indicates there was “scant physical evidence” left behind by Mr. Alleca, making the job ahead for the SEC and Receiver all the more difficult. Hopefully the Judge and SEC will eventually wake-up and do the right thing by bringing in real investigators and not in putting so much faith in the attorneys assigned to the case. To be clear, when I say “investigators” I mean the kind that carry Federal badge, duty weapon, AND have the keys to open and close a jail cell.
COntact me. He scammed me too. Mike
Someone needs to ask what happen to Thermold. A company in which Angelo purchased and then transferred out of his name right before lawsuit. Those assets alone were 5 mill. I know because I found Angelo As an investor to reopen this business. Lots of back door dealing. Somehow the company ended up in Arkansas. This company was bought with investors money. I personally heard Angelo explain a major decline in a clients portfolio to the client over the phone while we were in Germany. Also saw him blow &00 bucks at blackjack in Vegas in five min. Lived large Complete bullshitter and he cost me as well.
Call me. He got me too. Mike.