February 2011 Archives

February 24, 2011

Five Ways to Help Others Avoid Securities Fraud

FINRA's Investor Education Foundation recently posted information on its website encouraging investors to discuss securities fraud with friends, family and colleagues. The posting is entitled Five Ways to Warn Others About Fraud. The best warning given to investors was the importance of asking plenty of questions before investing and, in particular, to verify whether the salesperson is properly registered. A good starting point is to use FINRA's BrokerCheck, which provides a summary of the qualifications and disciplinary history of registered brokers and broker-dealers.

Click here to read the entire article on FIRNA's website.

February 23, 2011

E*Trade Faces Regulatory Scrutiny Over Auction-Rate Securities

etrade-building.jpgAccording to regulatory filings with the Securities and Exchange Commission (SEC), earlier this month regulatory authorities sent a "Wells Notice" to E*Trade Securities alleging securities law violations in connection with the firm's sale of Auction Rate Securities. A Wells Notice is not a finding of wrongdoing, but a letter that describes the securities law violations that staff recommends pursuing. E*Trade contends that the action is unwarranted and that the company is cooperating with the investigation.

See related article: Colorado Securities Commissioner Files Notice of Charges Against E*Trade Securities Regarding Auction Rate Securities

February 14, 2011

Wrap Accounts Are a Poor Choice for Conservative Investors

In my securities arbitration practice, I have witnessed a disturbing trend in which stockbrokers--eager to develop a lucrative fee-based advisory business--are moving all of their clients into wrap accounts. In a "wrap account," an investment advisor agrees to help manage a client's money for an annual fee which covers all commissions and administrative expenses. Wrap account fees can range from 1.5 to 2.5% of the portfolio's value. Because wrap account trades are commission-free, they are best suited for investors who intend to do a lot of trading. The trouble is, most investors neither want nor need a large amount of short-term stock trading. For occasional traders, a traditional commission-based brokerage account may be the most economical way to invest.

Dan Solin, who is a securities attorney, best-selling author and investment advisor, recently published an article in the Huffington Post featuring a case of mine that involved a wrap account offered by Wells Fargo Advisors ( formerly Wachovia Securities). In that case, the broker had transformed his entire brokerage practice into a "wealth management firm" by placing all his clients into wrap accounts that were managed by outside money managers. The arbitrator in that case agreed that moving a retired individual into a wrap account that charged 2.5% per year to invest primarily in equities was asking for trouble. In that case, the wrap account benefitted the broker, not the customer, since the broker would have earned very little in the way of commissions had the customer simply bought and held conservative income-oriented investments.

What should a conservative investor who needs a little hand holding do? The most frugal course of action is to hire an independent financial planner that charges an hourly fee to help develop a long-term investment strategy and periodically assist with rebalancing and adjusting the portfolio. Even at $400 per hour, the savings can be significant compared to paying 1.5 to 2.5% per year to a so called wealth manager.