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Brokers Do Not Act In Clients’ Best Interests

“Over the next week or so, the financial-reform bill that has been oozing its way through the Senate Banking “Committee may finally plop onto the Senate floor. Unfortunately, the bill is likely to lack a key provision requiring stockbrokers, insurance agents and others to act solely in the interests of their clients.

“That is a shame. The requirement was included in the earlier 1,136-page “discussion draft” of the bill. But it appears to have been horse-traded away in a last-minute push to secure compromise.  Why should you care? As of now, the roughly 630,000 brokers, bankers and insurance agents registered to sell securities must determine whether investments are “suitable”—based on how wealthy you are, what else you have invested in, your tax status and your investment objectives.

“Securities salespeople generally aren’t obligated to act in your best interest. They needn’t tell you that they make extra money pushing one particular investment or that cheaper alternatives might provide you a higher return.  Suppose two mutual funds are “suitable,” but one of them pays the broker a fatter fee. You may well end up in that one—without finding out that your broker had an incentive to favor it.

“On the other hand, financial advisers—who are regulated as “fiduciaries” under the federal Investment Advisers Act—are obligated to put you first. They must explain their fees, disclose conflicts of interest and disclose past infractions. If they get paid extra to recommend a fund or sell an insurance product, they have to tell you.

“If you find these dueling standards confusing, join the club. In 1973, the great financial analyst Benjamin Graham lamented the fact that “most security buyers obtain advice without paying for it specifically.”

From: The Intelligent Investor, Wall Street Journal, Feb. 27, 2010 by Jason Zweig

SEC Announces $550 Million Fine Against Goldman Sachs

“Washington, D.C., July 15, 2010 — The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.”

“Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.”

Don’t Bite the Hand That Feeds You

“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”

–Mayor Michael Bloomberg, Nov. 1, 2011

“Yesterday is history, tomorrow is a mystery, and today is a gift; that’s why they call it the present.”  – Eleanor Roosevelt

“The past is for knowledge, the present is for action and the future is for joy.” –Benjamin Disraeli

Occupy Wall Street, Republicans and Capitalism

“I’m so scared of this anti-Wall Street effort. I’m frightened to death,” said Frank Luntz, a Republican strategist and one of the nation’s foremost experts on crafting the perfect political message. “They’re having an impact on what the American people think of capitalism.”

Role of Vested Interests

“Thousands of persons have large pecuniary interests at stake, and, as might be expected, many of them view this great subject solely from the standpoint of self-interest.”

–George Westingh9ouse speaking about the  “War of the Currents,” cited in  “Bottled Lightning” by Seth Fletcher, Hill & Wang, 2011, p. 121

“The American people want what they have coming to them and they deserve to get it, good and hard.” – H.L. Mencken

“Everyone has a plan, until they get punched in the face.” – Mike Tyson

 

 

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