Articles Tagged with Charles Schwab

shutterstock_175320083The investor advocacy bar association PIABA (the Public Investors Arbitration Bar Association) has recently issued a report called “Major Investor Losses Due to Conflicted Advice: Brokerage Industry Advertising Creates the Illusion of Fiduciary Duty.” The PIABA report argues that the brokerage industry uses false advertising to convey to investors that the firms have a fiduciary duty to their clients only then to do a 180 turn when sued to claim that no such duty exists.

According to the report, some of the largest firms in the United States are falsely advertise in this fashion including Merrill Lynch, Wells Fargo, Morgan Stanley, UBS, Fidelity, Ameriprise, Allstate Financial, Berthel Fisher, and Charles Schwab. The report claimed that all of these firms “advertise in a fashion that is designed to lull investors into the belief that they are being offered the services of a fiduciary.”

In the wake of the financial crisis of 2008, the Dodd-Frank legislation authorized the Securities Exchange Commission (SEC) to pass a fiduciary duty rule that would apply to brokers, as opposed to only financial advisors. Most investors do not realize and are usually shocked to learn that there broker only has an obligation to recommend “suitable” investments, and not to work in their client’s best interests. Currently, the fiduciary duty rule only applies to financial advisors (and brokers under certain circumstances).

shutterstock_102242143According to the Financial Industry Regulatory Authority’s BrokerCheck system, there have been four customer complaints filed against former Sigma Financial Corporation (Sigma) and current Charles Schwab broker, Mark Johanson (Johanson) stemming from unsuitable Tenants-in-Common (TIC) investments.

Sales of TICs exploded during the early 2000s from approximately $150 million in 2001 to approximately $2 billion by 2004. TICs are private placements that have no secondary trading market and are therefore illiquid investments. These products were promoted as appropriate section 1031 exchanges in which an investor obtains an undivided fractional interest in real property. In a typical TIC, the profits are generated mostly through the efforts of the sponsor and the management company that manages and leases the property. The sponsor typically structures the TIC investment with up-front fees and expenses charged to the TIC and negotiates the sale price and loan for the acquired property.

TIC investments entail significant risks. A TIC investor runs the risk of holding the property for a significant amount of time and that subsequent sales of the property may occur at a discount to the value of the real property interest. FINRA has also warned that the fees and expenses associated with TICs, including sponsor costs, can outweigh the any potential tax benefits associated with a Section 1031 Exchange. That is, the TIC product itself may be a defective product because its costs outweigh any potential investment value for a customer. FINRA also instructed members that they have an obligation to comply with all applicable conduct rules when selling TICs by ensuring that promotional materials used are fair, accurate, and balanced.

shutterstock_93231562In the wake of the financial crisis of 2008, the Dodd-Frank legislation authorized the Securities Exchange Commission (SEC) to pass a fiduciary duty rule that would apply to brokers, as opposed to only financial advisors. Most investors do not realize and are usually shocked to learn that there broker only has an obligation to recommend “suitable” investments, and not to work in their client’s best interests. Currently, the fiduciary duty rule only applies to financial advisors (and brokers under certain circumstances) – more commonly recognized by the public as advisors who charge a flat fee for their services as opposed to commissions.

The fact that the investing public has absolutely no clue how crucial the fiduciary duty is to protecting their retirement futures and holding Wall Street accountable for mishaps has prevented any serious public debate to combat the millions of dollars the industry has and will spend to kill this part of the law. True to form, recently the House of Representatives passed a budget that would prevent the SEC from imposing a fiduciary standard on brokers during the upcoming federal fiscal year beginning in October.

What’s the big deal you may ask? Why is the fiduciary standard important to me? Well there are many reasons but maybe one story will highlight how the brokerage industry is currently allowed to operate to put their interests ahead of their clients. As recently reported in Bloomberg and InvestmentNews, an undercover U.S. Labor Department economist exposed how brokerage firms sought out federal workers to roll over their 401(k)’s with the government to IRAs with the brokerage firm even though the result could increase the client’s annual costs by as much as 50 times!

shutterstock_180690254The Financial Industry Regulatory Authority (FINRA) has determined that Charles Schwab & Co. (Charles Schwab) violated the self-regulatory organization’s rules by adding waiver languages to agreements that prohibited customers from participating in any class action cases against the firm. Schwab settled the claims and was fined of $500,000.  The firm also agreed to tell all its customers that the requirement is no longer in effect.

In October 2011, Schwab made amendments to the customer account arbitration agreement of over 6.8 million investors after it settled a class action securities case accusing the brokerage firm of misleading thousands of customers about its YieldPlus money market fund.  The YieldPlus fund sustained huge losses in 2008 and Schwab paid $235 million to resolve the allegations against the firm.

In the wake of Schwab settlement the firm amended its arbitration agreement to include a waiver provisions mandating that customers consent that any claims against the firm could only be arbitrated individually.

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