Dual-Registered Advisors Barred From Recommending 401(k) Rollovers

LPL Financial Bars Its Dual-Registered Advisors From Recommending 401(k) Rollovers in Brokerage Capacity

According to an internal advisor memo, LPL Financial is prohibiting its “hybrid” or dual-registered advisors to recommend 401(k)to IRA rollovers to LPL clients in a brokerage capacity. Investment News reports that the policy was adopted in response to the Department of Labor’s new fiduciary rule. The rule imposes fiduciary duties on financial advisors when giving recommendations regarding 401(k) plans.

What are “hybrid” or dual-registered advisors?

LPL Financial is a FINRA-registered broker-dealer, and FINRA-licensed stockbrokers are registered with LPL to sell securities to clients. A broker may also be (but is not required) licensed separately through the SEC as a Registered Investment Advisor (“RIA”). Federal law and regulations already impose fiduciary duties on RIAs when giving investment recommendations. Brokers, on the other hand, may be held to fiduciary duty standards only under certain circumstances or through state law. FINRA rules only mandate that brokers give recommendations that are “suitable” for a customer based on their customer profile. A recommendation may be “suitable,” but is not in the best interest for that customer, which satisfies FINRA rules but violates the higher fiduciary standard.

Why does LPL care?

Under FINRA rules, common law and securities statutes, LPL has supervisory responsibilities over its registered brokers, including its dual-registered broker / RIAs. FINRA has been clear that brokerage firms can’t turn a blind eye to the activities of their brokers when they supposedly are “wearing the RIA hat”. Depending on the circumstances, it may be better for an investor to keep his or her 401(k) plan, even after leaving an employer, because of lower costs or certain tax advantages. If the rollover recommendation is not in the best interest of the client – above even the broker’s own interest – then it could be a breach of fiduciary duty by the broker and by LPL to make the rollover recommendation. Financial losses caused by the unlawful conduct may be recoverable by the investor.

FINRA is the Financial Industry Regulatory Authority, a self-regulatory organization that is responsible for licensing, regulation, and enforcement of rules governing the activities of 3,800 broker-dealers with 633,300 brokers. FINRA also operates the largest dispute resolution forum for customer disputes with their brokers and brokerage firms. Customers can file a claim in FINRA arbitration to initiate proceedings for improper conduct like unsuitable investment recommendations, selling fraudulent investment products, excessive transactions and commissions (“churning”) in an account, and other claims to recover investment losses caused by such improper conduct.

The Investor Defenders attorneys at Samuels Yoelin Kantor LLP represent investors each day who were unlucky in hiring the wrong adviser. We work to recover investment losses caused by negligent portfolio management, unsuitable product sales, excessive transactions (“churning”), and other bad acts.

If you are concerned about the investments or conduct of your financial adviser, contact the Investor Defenders for a free, confidential initial consultation with an experienced securities litigation attorney.  We represent clients nationwide since 1985.

For more information about different types of securities claims, the FINRA arbitration process, current investigations, sample cases and results, and about our attorneys, please call us: 800-647-8130.

See the full Investment News article about LPL Financial’s on their website.

Frontline Documentary Examines Brokers

The public broadcasting series Frontline has posted an hour-long documentary called “The Retirement Gamble” which examines Americans’ retirement savings crisis. The piece presents solid, if basic, information on the mechanics of financial products, the ‘tyranny” of 401(k) fees and the dangers of undisclosed risks.

Relatively educated advisors may want to skip ahead to the fifth chapter, a 13-minute segment called “Advisers or Salesmen?”, which explores the skills and motivations of financial professionals.

The documentary can be viewed online in its entirety.

Paulson Investments Fined

Matthew Kish of the Portland Business Journal notes that Portland’s Paulson Investment Company agreed to pay a $17,5000 fine ordered by FINRA.

The regulatory action by FINRA alleged that Paulson neglected to execute some securities clients’ orders “fully and promptly” back in 2010. Paulson did not admit or deny the allegations, but has separately provided restitution to its affected clients.

(Portland Business Journals at http://www.bizjournals.com/portland/news/)

New Criminal Checks for Mass RIAs

Among the fifty state securities regulatory agencies, the Massachusetts Securities Division is seen as a leader, and now Massachusetts has moved to make a full criminal background check a prerequisite for qualifying as a Registered Investment Advisor in the state. Applicants are currently required to disclose that information on a “Form U-4”. The new check would simply verify that information. Arizona, Florida and California have similar procedures and other states may now follow suit.

(Investment News at www.investmentnews.com)

Allegations Dog Largest Non-Traded REIT

The largest of all non-traded REITs is dealing with two separate sets of complaints by shareholders’ groups alleging misrepresentations and excess fees. These complaints against the $11B Inland American Real Estate Trust come on top of an SEC investigation launched in November last year. The SEC probe is said to focus on fees. Similar allegations about fees and deceptive valuations have been lodged against many other REITs, whose high commissions (in the neighborhood of 15%) provide an incentive for stockbrokers’ recommendations.

(Investment News at www.investmentnews.com)

Investor Warning on SLABS

A recent uptick in the market for securitized student loan debt has led to warnings about the mammoth size of student debt among Americans (it stands at $970B), underlying default rates of about 30% (with payments late by at least 90 days), and here-we-go-again comparisons to the collapse of the mortgage-backed securities market in 2008. A Wall Street Journal of February 28 noted that Sallie Mae’s sale of $1.1B of student-loan asset-backed securities (deemed SLABS) drew 15 times the required demand for its highest-yielding, riskiest “slice”. College loans is the only category of consumer debt that’s continued to rise all through the recession. Any potential investors should note that, like mortgage-backed securities, SLABS have been re-bundled in a way that can mask the true underlying risk.

(The Atlantic at theatlantic.com)

FINRA Investor Alert on Bond Risks

Bond Risks and Rate Hikes

FINRA has released an Investor Alert entitled “Duration — What an Interest Rate Hike Could Do to Your Bond Portfolio”. If you hold bonds, or hold other financial products with positions in bonds, your investment is vulnerable to duration risk. “Many economists believe that interest rates are not likely to get much lower and will eventually rise. If that is true, then outstanding bonds, particularly those with a low interest rate and high duration, may experience significant price drops as interest rates rise along the way.” Read the entire Alert on FINRA’s web site, which has additional useful resources such as Broker Check.

(FINRA at www.finra.org)

NYT Discovers Yield Chasing

On the heels of Massachusetts regulators cracking down on LPL Financial for the sale of nontraded REIT, the New York Times describes a trend of “steep losses on complex products that until a few years ago were pitched only to the most sophisticated investors”. In reality this phenomenon of “yield chasing” is not exactly new. But financial losses from the 2008 crash have motivated many more formerly conservative retirees into exotic investments. These include nontraded REITs, other real estate investments, private placements, offshore enterprises, penny stocks, high-yield bonds, “business development companies”, and other dubious instruments. Even if legitimate these kinds of investments can involve unpleasant surprises: higher risks, volatility, liquidity problems when it’s time to cash out, and higher commissions to your broker.

(New York Times at www.nytimes.com)

Wearing Sunglasses Indoors

A person who commented (“GMooG”) on today’s New York Times “yield chasing” story presents the following advice. Worth repeating. With a grain of salt.

“Rules for Investing

“Never trust your money (or your children) to a man who:

1. Wears sunglasses indoors;
2. Wears a suit that is shiny, or costs more than $1,000;
3. Flies on private jets;
4. Calls you “pal” or “buddy”;
5. Says you need to “act now”;
6. Slicks back his hair;
7. Gets manicures or pedicures;
8. Drives a car that costs as much as you have to invest;
9. Has an office with an ocean view; or
10. Wears any jewelry other than a wedding ring and a watch.

“This is not a complete list. And following it will not make you rich. But if you do follow it, you will have eliminated about 90% of all people trying to rip you off.”
(Online commenter, New York Times at www.nytimes.com)

FINRA Abandons RIA Oversight For Now

FINRA Chairman and CEO Richard Ketchum has announced that the organization will not pursue tighter regulation of Registered Investment Advisors as a priority in the short term. After a five-year and $5M FINRA lobbying campaign to increase effective oversight of RIAs, this change of tactic responds to an absolute lack of interest from the governing House Financial Services Committee. That’s unlikely to improve any time soon. The RIA community has greeted the news with relief, tinged with suspicion that the issue has not disappeared. For investors, it means continued vulnerability to fraud. RIAs will continue to fall under oversight by an SEC which can only audit advisors once every eleven years on average.

(Reuters at http://newsandinsight.thomsonreuters.com)