Chicago Tribune July 27, 2001 (Kathy Bergen)
Anyone worked with a stockbroker lately?
Not someone whose calling card reads “financial adviser” or “financial consultant,” but someone who identifies himself as a stockbroker, plain and simple? Chances are that for many investors the answer is no.
In a trend that has accelerated sharply in the last two to three years, rapidly diversifying brokerage firms are recasting their sales forces as financial advisers in an attempt to sell a widening array of fee-based services.
The mission is to become a one-stop financial shop, with revenue funneling in from many sources. And the mission has become increasingly urgent, both because online upstarts have forced trading commissions to bargain-basement levels and because the soured stock market has lessened investors’ appetite for trading.
The winners in this makeover, industry players contend, have been individual investors.
“Pricing is more competitive, financial consultants are smarter because training programs are more rigorous and advanced, and investors have the advantages of consolidation as never before–the convenience of packaging their financial life,” said Susan Thomson, a spokeswoman for Salomon Smith Barney.
Yet a murkier aspect is emerging as well, some observers say.
Brokers’ claims of financial planning expertise may, in some cases, exceed their level of knowledge. And trusting clients may end up following advice that is either poor or outright wrong, and paying the financial consequences.
“Anyone can call themselves a financial consultant. Insurance salesmen do it, stockbrokers do it,” said Sue Stevens, director of financial planning for financial research firm Morningstar Inc. “They may not have experience in other related areas, but there is pressure on them to be full-service planners.”
“More than ever, it’s caveat emptor,” said Michael Flanagan, an independent brokerage industry analyst who heads Financial Service Analytics in Philadelphia.
Education gaps may be closed over the next few years as brokerage firms continue to beef up their training requirements, said James Eccleston, a Chicago-based securities attorney, but in the interim, “I think there will be a legacy of mistakes, and the results won’t be seen for many years.”
Flaws in retirement or estate planning, for instance, may not show up until a client retires or dies.
Already, Eccleston and other securities attorneys say they are seeing problems surface as a result of brokerages moving into the financial advice business. In some cases, investors who feel they received incorrect financial planning advice are filing claims against brokerages, seeking resolution through the arbitration forum run by the National Association of Securities Dealers.
Among them are Greg and Nancy Guidolin of west suburban Bloomingdale, who allege that Prudential Securities Inc. provided them with a flawed tax strategy for the exercise of stock options that Greg Guidolin had received from his former employer, an allegation that Prudential denies.
Greg Guidolin, 43, turned to Prudential for help in the exercise of 20,000 options he had received from Adaptive Broadband Corp., a wireless telecommunications firm where he had been vice president of sales, engineering and operations before switching jobs recently.
His financial adviser at Prudential, John Jaburek, “represented that Prudential–with the help of its Prudential Securities Executive Compensation Group–was extremely knowledgeable in handling such complex transactions,” according to the claim, which is directed at Prudential, not at Jaburek.
The firm came up with a complicated strategy last year that would allow him to stay invested in the company after he exercised his options in March 2000, yet be able to cover taxes he expected to owe on the exercise gains, the claim said.
But it was based on an incorrect assumption that any capital losses in his continuing stake could be used, for tax purposes, to offset the income gains that had been achieved by exercising the stock options, said Eccleston, who is representing the Guidolins.
As it turned out, his company shares headed south later in the year, but his losses could not be applied to the $275,000 he owed Uncle Sam.
The Guidolins are seeking to recoup $424,674, the investment losses they attribute to following Prudential’s advice.
Prudential contends that the Guidolins’ claim is without merit and that their losses were due to the precipitous decline in the company stock and to Greg Guidolin’s conduct.
“It seems to be a case where he ignored our advice to check with his accountant before exercising his options,” said Susan Atran, a spokeswoman for Prudential Securities. “We are not tax advisers, and we repeatedly tell clients to consult with their accountants and tax advisers for tax advice.” Greg Guidolin says he was not advised to check with his accountant.
While the Guidolins’ case centers on whether they received flawed advice, other wounded investors say they were tripped up, at least in part, by the way their brokers portrayed their expertise.
Thaddeus Wong, a Chicago real estate broker, said one reason he put his faith in a Morgan Stanley broker was that the broker portrayed himself as a retirement planner.
“If someone says they are a retirement planner, and they work for a reputable company, you assume they spend a lot of time and energy knowing what they’re doing,” said Wong, 32, who opened a $1 million investment account with Morgan Stanley early in 2000.
“The entire account was wiped out in a little over eight months, through buying tech stocks and options, and shorting securities,” said Andrew Stoltmann, attorney for Wong.
Wong filed an arbitration claim July 12 against Morgan Stanley and broker John S. Spillane, who left the firm in November to join another brokerage, alleging churning and excessive trading, among other things. The claim seeks compensation for his losses.
Morgan Stanley declined to comment on the case, saying regulators had not yet forwarded it to the firm. Spillane also declined to comment.
To be sure, many highly qualified financial planners work at brokerages, said Stevens, of Morningstar. “It just depends who your assigned consultant is. At most organizations, the bigger a customer’s balance, the more experienced person they will have on the phone.”
Many brokerages, in addition to providing in-house training, are pushing their brokers to get a certified financial planner designation, she said.
To get the designation, a person must complete college-level course work, pass a 10-hour exam and have three years of financial planning experience, according to the Certified Financial Planner Board of Standards in Denver.
In shopping for an adviser, investors should check credentials, references and disciplinary history, observers say.
“I’m always bemused by the time that I see consumers spending to buy a new kitchen appliance or a new car,” said brokerage analyst Flanagan. “And they will spend considerably less time and effort in researching and getting references on a financial adviser.”
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