Securities Lawyers Blog
The law offices of Gana Weinstein LLP are following the investigation by the Massachusetts Secretary of the Commonwealth’s office where the Secretary of the Commonwealth opened an investigation into Wells Fargo’s brokerage and advisory sales practices. Specifically, the state announced that the investigation seeks information related to inappropriate referrals of brokerage customers to managed and advisory accounts, unsuitable recommendations of alternative investments, as well as unsuitable referrals and recommendations in connection with 401(k) rollovers.
These three areas have been incredibly problematic in the securities industry in recent years. First, brokerage firms have been accused of referring clients from brokerage accounts into advisory accounts even though the client does not need the advisory account. The issue is that the fee structure in the advisory account is much greater and the client receives no additional investment service that the customer needs for the increased cost. The second issue concerns complex securities products often referred to as alternative investments. These investments can be problematic because they advisors are often paid high commissions in order to sell alternative investments that are rarely appropriate for investors. Finally, in recent years there have been issues with advisors recommending a 401(k) rollover into a brokerage account. The issue is that most 401(k) plans are very cost effective for investors and keep fees very low. By contrast, brokers want to amass client’s 401(k) assets where the firm and broker can charge much higher fees for services that the client does not need. Many times the client would have been better off not transferring their accounts to an advisor due to the higher cost and the potential for unsuitable investment advice.
Brokers are required under the securities laws to treat their clients fairly. This obligation includes the duties to disclose material risks of the investments they recommend and to present products, particularly complex or confusing products, in a fair and balanced manner that allows the client to evaluate the recommendation. Another important obligation advisors have is to make only suitable recommendations for investments to the client. There are many investments that are not appropriate for the majority of investors or for certain investors given their risk tolerance, age, and other factors. Advisors should not present these investment options to clients. There are two screens that advisors must employ to determine whether an investment is suitable for a client. First, there must be a reasonable basis for the recommendation – meaning that the product has been investigated and due diligence conducted into the investment’s features, benefits, risks, and other relevant factors. The advisor must conclude that the investment is suitable for at least some investors and some securities may be suitable for no one. Second, the broker then must match the investment as being appropriate for the customer’s specific investment needs and objectives such as the client’s retirement status, long or short term goals, age, disability, income needs, or any other relevant factor.
Investors who have suffered losses are encouraged to contact us at (800) 810-4262 for consultation. At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts. Claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.