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Government Research Shows Broker Misconduct Costing Investors Up to $17 Billion a Year


By David Meyer

The Chairman of the President's Council of Economic Advisers drafted a memorandum on January 13, 2015 that shared research findings regarding inappropriate stockbroker practice. According to the memo, some broker practices, such as boosting commissions through excessive trading, or churning, cost investors between $8 billion and $17 billion every year. The memo also notes that the researchers' estimates of up to $17 billion in investor losses are "quite conservative."

The memo makes the argument for a regulation imposing a fiduciary duty on brokers handling retirement accounts that would require them to always act in their clients' best interest. Unsurprisingly, the large brokerage firms on Wall Street, notably Morgan Stanley and Bank of America Corp., have spent years lobbying against the induction of this rule, citing additional costs to the proposed regulations.

In contrast, according to the Labor Department, a fiduciary duty on brokers would provide meaningful protections to investors and an effective update to an outdated standard. Academic research has established that conflicts of interest affect financial advisors behavior and that advisors often act opportunistically to the detriment of their clients. Although the new rule would not ban sales commissions, the proposal would be a middle ground that requires brokers to guard against conflicts and avoid certain self-dealing transactions.

The information contained in The Firm’s posts on its blog, fraud alerts, investigations or elsewhere on the site is based upon information obtained from other sources including, but not limited to, news outlets and federal, state, and regulatory agency filings. All suspects and subjects of postings herein are presumed innocent until proven guilty in a court of law or administrative action and any and all crimes are alleged until a court or regulatory agency finds otherwise .

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