Your Broker and You - A Conflict of Interest

October 16, 2012 by Thomas F. Burke, P.C.

James Zweig of the Wall Street Journal had an interesting article in the October 6-7, 2012 Business and Finance Section. He reported that the Financial Industry Regulatory Authority ("FINRA") is examining how major banks and brokerage firms define and deal with conflicts of interest between themselves and their clients. In the next few weeks, FINRA will conduct an examination of 14 big firms to discover and mitigate conflicts of interest.

As everyone knows, a broker makes his money by getting his/her clients to make purchases in the marketplace. In some instances, brokerage firms have encouraged clients to tap into the equity in their homes to speculate, have unloaded underperforming or toxic portfolios on clients and have manipulated interest rates for their own benefit.

What caught my attention in the article was a discussion of a recently published study conducted by Carnegie Mellon University which involved hundreds of physicians and financial planners. They were asked to evaluate proposed rules concerning conflict of interest policies. Half of each group evaluated proposed rules relating to doctors and half evaluated proposed rules relating to financial planners. Each set of proposed rules had almost identical wording. The doctors thought that financial planners should not be accepting gifts of pens, coffee mugs, free meals or educational junkets from investment companies, yet saw no conflict with accepting pens, coffee mugs, free meals and educational junkets from drug companies. The financial planners had the identical mirror image view that doctors should not be accepting gifts from drug companies but saw no conflict with accepting gifts from investment companies themselves.

So what does this tell us about how individuals are able to weigh conflicts of interest? It tells us that most people expect everyone else to be very aware of conflicts of interest but at the same time cannot understand or admit that such standards should apply to them as well.

There is an abundance of laws, rules and regulations in place that require financial advisors to only make recommendations that are in the best interest of their clients. As the study demonstrated, it may be difficult for any financial advisor to objectively determine whether or not an investment recommendation is suitable for his/her clients. Let's hope that FINRA discovers that the major banks and brokerage houses have adequate procedures in place. Let's also not forget that each investor has the right to ask for an explanation of the reasons why any investment is the right one for him/her.

Thomas F. Burke has been handling securities litigation in state and federal courts and in arbitration forums since 1983. If you feel that you have received unsuitable trade recommendations, please contact Mr. Burke at 312/362-1300 or by email at