Contrary to popular belief by 93% of affluent Americans, your stockbroker does not have a fiduciary obligation to you.
Like it or not, the product stockbrokers sell to you does not have to be in your best interest. "It simply has to be suitable given the investor's risk tolerance, goals, etc.," said Joshua Brown, AKAThe Reformed Broker
, while speaking to Max Keiser on theKeiser Report
. Consequently, this means a stockbroker can sell you anything he or she wants so long as it's "suitable." Brown was particularly amused by a poll conducted in 2010 that asked affluent Americans if their stockbroker had a fiduciary obligation to them. A whopping 93% of respondents said yes. "They were all wrong," said Brown. "There's a difference between being someone's fiduciary and being someone's broker, who's held to the lesser, suitability standard, and no one knows the difference other than people in the industry. I think that's something that needs to change, and I've dedicated a lot of my time on the blogs and in the book to try and bring that out." The book Brown is referring to isBackstage Wall Street
, an inside look at what really goes on within the financial markets. "I think there's no reason in this day and age for anyone to buy investment products from someone who's making a commission on the sale of that product," Brown told Max Keiser. "That is not financial advice. That is not a fiduciary role being carried out. All that is, is somebody selling you something that they know more about and that they're taking a margin in. Nobody needs to be pitched anything -- over the phone, in a meeting, or at a seminar. People need to read the book and understand the difference between sellers of products versus providers of advice." Further, Brown said that "just because someone is in an 'institution' or is an 'accredited investor,' it doesn't necessarily mean that they're any smarter than an individual investor." "And the protections of institutional investors and accredited investors, meaning wealthy people, is significantly less than they are for other people," he added. "It's assumed that, 'Well, this guy's rich….don't worry about him, he'll take care of himself.' Of course, that's never the case."
Sacking Goldman Sachs
Upon leaving Goldman Sachs, Greg Smith wrote a now-famous op-ed in theNew York Times
, trashing his former employer. "People are somewhat confused about the difference between me and him, because I just kind of wrote this tell-all Wall Street book," Brown said on the Keiser Report. "The major difference is that Greg is delusional. He seems to think that over the last five years something has changed. I think Greg is kind of fooling himself in thinking that everything was fine for 12 years, and then all of a sudden something changed. It's always been this way. If you do the research on the history of Wall Street and Main Street relationships, which is what my book covers, there's never been any difference, it just becomes more or less obvious, depending on the era that we're in."
Finally, Brown warned against the dangers of shady brokerage firms who have "figured out a way to buy shares from Twitter and FacebookFB
employees who need liquidity." "They're taking these shares, they're bundling them in these private funds with escrow accounts," said Brown. "They're layering it with fees on top of it, and these are restricted shares of stock. They're selling it to people as though they're buying pre-IPO shares in Facebook, when in reality what they're really buying is shares of a fund that owns stock that may or may not be sold at some point. "It is probably the biggest scam going on right now. People are cold calling investors with this thing. I think everyone needs to be on their guard. If somebody calls you up and offers pre-IPO shares of Facebook at a discount, it's a lie, they don't have them, they won't give them to you, you are about to be screwed. Do not trust anyone that has something that's too good to be true."Follow me @LouisBedigianBZ
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Posted In: Success StoriesTechGoldman SachsGreg SmithJosh BrownJoshua BrownKeiser ReportMax KeiserThe Reformed Broker