The following is a transcription of Wall Street vs. Main Street, a radio show/podcast hosted by the firm’s managing partner D. Daxton White.
In this episode, Mr. White talks about FINRA statistics, including the number of cases filed, and how these statistics can be useful to investors.
Producer: Welcome to Wall Street versus Main Street a different take on the investment show with our host Dax White. Dax White is the managing partner of the White Law Group, a national securities fraud, securities arbitration and investor protection law firm with at offices in Chicago, Illinois and Vero Beach, Florida. The White Law Group has represented hundreds of investors in FINRA arbitration claims against their brokerage firms and throughout this show Mr. White will shine a light on some of the tricks of the brokerage industry while also providing valuable information for investors on how to successfully navigate the investor/ financial advisor relationship.
Dax: Welcome everyone you’re listening to Wall Street versus Main Street I’m your host Dax White and as our lead-in indicated I’m a securities attorney that represents investors in claims against their brokerage firm. So we call this this a different take on an investment program. I’m not a financial advisor, I’m not here to give you investment advice or to suggest you buy XYZ stock or sell this or anything like that. Instead the objective is to sort of arm the investment public with some of the information that I’ve picked up in my years of representing investors, with the hopes that some of the information will improve their relationship with their financial advisor, get them asking better questions and get things more in balance so that we can hopefully avoid situations where you would need me and so that that’s the goal each week. And we’ll try to tackle different topics as we go along and then the topic. We are going to talk about this week are FINRA statistics on the types of claims being filed, the numbers of cases being filed etc. because I think there’s a lot of takeaways that you could take from that both in terms of what kind of thing should I be on the lookout for, what types of fraud is out there, when are claims being filed etc.
So if you don’t realize it already either from listening to the show or just from your own general knowledge, FINRA is the regulatory body for the securities industry here in United States. They are paid for by the industry but in theory are supposed to be independent in terms of their regulation of the brokerage industry and any broker-dealer in the United States is registered with FINRA and so are their employees. So there’s a regulatory function that’s separate and apart from what I do, what we’re talking about here, but they do have a regulatory component not unlike the SEC where they step in and investigate brokerage firms they audit them and they can impose sanctions and fines and the like.
They also have an arbitration portion of FINRA that’s the part that I deal with because whether or not you realize it or not, when you signed up for brokerage account here in United States I would say 99.99% of time buried somewhere in the fine print there of that agreement is language that says if you have a dispute with us you agree to waive your right to sue us in court and instead you have to bring a claim through FINRA arbitration. It used to be called the NASD. And so that’s why all of these claims that we deal with in our practice, or any claim you might have with your brokerage firm is going to be a FINRA arbitration claim. And again, that’s why the statistics will be relevant in terms of discussing, okay if that’s where these disputes are heard, than what are the types of claims that FINRA sees and what are the statistics because the one thing that they do a great job of is publishing their statistics and giving you sort of a snapshot of what’s going on right now in FINRA arbitration.
So the basic take away I think generally speaking from FINRA arbitration’s in the numbers of claims that would be filed, is that FINRA arbitration is very much counter cyclical to the market. And I think this intuitively makes sense in terms of, you know, when would you even conceive of bringing a claim. And so when the markets are up generally people are either happy with their financial advisor or maybe they’re not happy but they’re not so mad that they are going to do anything about it. I think this past year’s a perfect example that it’s born out in the current statistics. Market was up approximately 30% depending on which index you want to look at, but I think that’s the basic number for the S&P. And so if the markets up 30% and let’s say your financial advisor has a poor strategy, because of course the reality of investment fraud negligence etc., is all these things are happening all the time regardless of market influences, but they’re usually flushed out when the market corrects because that’s when you become aware that maybe you got a bad strategy. And again it’s born out when you see the market is clipping along like it was last year. Markets up 30%, let’s say your broker has a poor strategy and you’re only up 5% or 10%. You might be a little peeved but not necessarily going to do something about it. You’re not going to call a securities lawyer or an investigator or figure out if there’s some claim that you should bring. It’s typically going to happen when the markets down maybe 10 – 20% and your portfolio is down 50. That might raise some eyebrows and get you thinking, what went wrong here, why is my portfolio doing so much poorly than everybody else’s. And again so that’s born out in the most recent statistics that were published by FINRA in terms of just the sheer number of claims being filed.
The most recent statistics were published in September of this year and they have, so far this year about 2500 cases have been filed, which is a 14% decline from 2014. Makes sense but more drastically and more in terms of a highlight of that particular point, is that the claims are down dramatically from what we saw after the great recession 2008. I think the claims in 2009 were about 7000 cases were filed, that was the peak year. But even in 2010, 2011 you are seeing 5000+4000+ cases being filed and now you’re down to in about 2500 through September. So let’s say that it flushes out the same way for the rest the year, maybe you’re talking 3000- 3200, but at least half of what you have seen in 2009. And again that goes back to the larger point that things are sort of counter cyclical to the market. Market goes up claims go down. What’s not discussed in those numbers is not all those cases are even investor cases.
FINRA arbitration is also the litigation form for disputes between advisors and their employer. And there’s a whole smattering of types of claims that might be involved there including breach of contract on promissory notes. A lot of people don’t realize this but when a financial advisor switches firms and they send you this letter saying you know I’m now registered with this firm because they’ve got a better platform an they’re going to do all these great things for you that’ll improve the servicing of your account. What you may not realize is that that new firm likely I wrote the financial advisor a very large check to induce them to come over and it’s usually structured as a forgivable loan. The firm will pay them a couple hundred thousand dollars depending on the size, or the number of clients they’re bringing over and if that person stays there for five years, which is typical in terms of the agreement, than the firm agrees to not require you to pay it back, but if you leave after six months than you got to give the money back. So what happens is a financial advisor switch from firm to firm that creates litigation over the enforcement of those agreements. Those are typically call promissory note claims but, you also have just garden-variety employment disputes. I was promised this, they didn’t deliver, you know, I have a hostile work environment. Whatever it might be in terms of your employment arena financial advisors have signed a similar provision, as to what their clients signed, that says you can’t go sue my brokerage firm in court I’ve got to go do it through FINRA. So in that, in those statistics in terms of 2500 cases that have been filed this year, I don’t know what the breakdown is, but I bet you a good chunk of those are actually employment cases, which suggests that the numbers are even that much further down from the peak. Because I think those employment cases, those promissory cases are fairly consistent you might see more movement at certain times because of you know maybe there’s some M&A happening where firms are acquiring other firms you got a bunch of guys jumping ship because they don’t want to be at the new firm or what have you. But for the most part those types of disputes the employment stuff the promissory stuff is probably pretty consistent. The big fluctuations are going to be in your customer complaints. So again obviously those numbers suggest that we’re at sort of a low point and I think that’s because last year the market was up 30% so even if even if you’re not performing in line with the market, you’re probably not calling a lawyer
The other thing that was broken down in the statistics FINRA published, which I think is of value to people in terms of you what should I be on the lookout for. Okay, you know I’m not up 30% last year maybe that’s a red flag. You know maybe I should, even though I made some money last year, maybe I should be taking a closer look at what’s going on my portfolio and now what should I be on the lookout for. And so FINRA has broken down, here the types of claims that have been filed. The most common of which is breach of fiduciary duty. We talked about this in previous episodes but generally speaking I would argue that financial advisors do have a fiduciary duty to their clients. The brokerage industry would certainly disagree with me on that point. That’s often litigated in hearings, in terms of whether not that duty exists, but I would say that hundred times out of a hundred investor certainly think that it’s there. I think in the relationship between investor and their financial advisor the assumption, whether or not the broker would admit it, is that the broker is looking out for their best interest. That he’s making a recommendation that is that is in my best interests and not the financial advisors. And so that’s why I think you see the vast majority or the number one claim is a breach of fiduciary duty where the investor is arguing you know he had this responsibility to look out for me and he didn’t., so that that’s the most common type of claim.
The second most common right now is negligence. That one is pretty self-explanatory. Obviously in that context you be arguing that, you know here’s the baseline for what a financial advisor should be able to deliver in terms of investment recommendations, service, what have you and my financial advisor was negligent in not meeting that bar. I think typically it would be in the context of making an appropriate investment recommendation but in terms of how FINRA categorize it would encompass all manner of negligence whether it be failure to execute a trade. Maybe you called your financial advisor and said hey I want to sell XYZ stock. The next day it tanks you take a bath because your broker failed execute. That would be negligent on their part in terms of what their obligation would be to you. Certainly, if you called your financial advisors and said sell something your expectation is that they’re going to do that. So that would fall under that category of negligence but generally it covers any instance where the financial advisor didn’t meet the bar in terms of what their generally required to do as a registered representative in the in the brokerage industry.
The next most common type of case in terms of what’s FINRA has broken down of what’s being filed right now is failure to supervise claims. And a lot of these, as we go through them ,breach of fiduciary duty, negligence, failure to supervise, the reality is when we bring a case we’re going to bring a cause of action for each of these. So this might be you know the same cases that are falling into multiple categories. Because you know, just to give an example, you might be arguing in one hand that your financial advisor in making a unsuitable investment recommendations breached his fiduciary duty to you and you might also be arguing and the firm has liability as well because they’re supposed to be supervising them and making sure that he doesn’t reaches fiduciary duties that can be the same case. But in terms of the way FINRA broke it out, it’s the third most common cause of action that’s being raised right now. And basically it would encompass any instance where the brokerage firm is required to monitor their advisors and make sure they are complying with general FINRA rules SEC rules etc. and a customer who is bringing a FINRA arbitration has alleged that they failed to do so. That’s your failure to supervise.
The next most common is breach of contract. I suppose a lawyer can certainly make an argument that in making unsuitable investment recommendations or in breach of fiduciary duty or in being negligent, they have somehow breached a specific contract that the customer has entered into with the brokerage firm. So that could that could certainly include customer complaints. My firm does not generally break out a breach of contract allegation so I would think, although I’m not sure, that some of these breach of contract claims that are again, making the fourth most common type of claim being filed with FINRA, are those employment stuff that we talked about. The promissory note claims, employment disputes, those would very definitely be breach of contracts because you’ve got a specific contract they are talking about. In a promissory note dispute between a financial advisor and the brokerage industry the brokerage industry is going to, as an exhibit attached, here is the promissory note he signed. The note said we’re going to loan you this money and if you stay for five years you don’t have to pay it back but if you do you’re in breach and you got to pay back so certainly that would be a breach of contract claim. FINRA doesn’t break down specifically and tell you, tell me, in the statistics they publish that’s what they’re talking about. But I would think that’s a good chunk of those breach of contract claims because again there’s hundreds of those cases filed every year.
The next most common are misrepresentation claims and that the final one is unsuitability. Again, going back to just what we generally do, you know our garden-variety claim is going to include almost all of these except for that breach of contract. It’s going to be breach of fiduciary duty, a claim for violation of that, negligence failure to supervise, misrepresentation, unsuitability but those can all be the same basic fact pattern. Where you got a financial advisor whose made investment recommendations that were both inappropriate and resulted in substantial losses. And so, obviously in terms of the FINRA statistic they broke it down and that’s the most common all the way down. But again I think there’s a lot of overlap there probably in terms of the cases that are being filed and then arguing all of those violations.
The next thing that FINRA does, which I think is great terms of breaking this out, is to also break it out by the types of investments that are at issue. So if you bring a Finra arbitration claim alleging that your financial advisor breached a fiduciary duty to you or was negligent to you or the firm was failed to supervise your financial advisor. FINRA will, also in their statistics published what investments were talking about. It might be a whole host of investments because generally speaking you can’t just cherry pick the ones that loss and go see your financial advisor and say notwithstanding the fact that he did great for me in 99 of my investments, in this 100th investment I lost money. You’re typically going to be looking at the entire portfolio and arguing overall this investment plan that you came up with was negligent, or you breach of fiduciary duty in making these recommendations, or that it was in some way unsuitable. And so you’re going to be talking about a lot of different things. Unless you’ve got a really over concentrated portfolio in a specific type of investment, maybe then you talk about one. But I would say generally speaking if you’re talking about a full portfolio your going to see a couple ones that fall on this list. But for the most common one in terms of what’s filed, the investment that would be an issue, according to FINRA statistics is just common stock. I think most listeners will certainly know what that is. Obviously if you buy a share of Apple and you make an investment I think Apple’s trading about $117 per share right now so if invest $117 you’ve bought one share of common stock about. And obviously the fact that common stock would be the most common FINRA claim that doesn’t suggest you should not be investing in stocks. I don’t think that’s really what these, that’s not the take away that you can make from the statistics. but clearly you’ve got investors who are alleging that there are problems with some recommendations being made with respect to common stock. I would say based on my own experience and this isn’t something the FINRA breaks down but those problems might be unsuitability. There is a whole range of common stock, you’ve got your Apple which is the largest, currently the largest by market capitalization company in the world, but you also have penny stocks, and you have a high flyin stocks, and you’ve got Netflix which is one month up 50% and the next month is down 20, you’ve got high risk and you have low risk stocks. My guess is, in terms of the common stock claims that are being filed, that they’re probably targeting investment recommendations in very high risk common stocks. I don’t think there is should be any take away that common stock up it’s the number one FINRA claim so we should avoid that. Not all stocks are created equal.
The next one is in terms of most common investments cited in claims is mutual funds. I think it’s the same take away there, not all mutual funds are the same. You’ve got mutual funds that are focusing on a high risk basket of investments whether it be pharmaceuticals, or emerging markets, or tech in you know a specific area, or what have you. And then you got mutual funds that are sort of a blended portfolio of the entire market that’s trying to reduce your risk and exposure regardless of what happens in the external market forces. And so I think it’s the same there were obviously you have claims being brought that have to do with mutual funds but that doesn’t suggest you shouldn’t be investing mutual funds, they are not all created equal.
The next one is corporate bonds. Again I think it’s the same, should be the same take away there. You know it if you’re talking about bonds and GE, I think that’s a very safe investment that’s established company, but there are also junk bonds out there that I think may be the next wave of cases that have been a been written by very high risk growth oriented oil and gas companies. Whether or not they’re the company’s fracking in South Dakota or wherever, but there was a lot of debt written last year as these companies started raising money, before oil prices tanked and they were paying 8-9%. There’s an obvious correlation between risk and return. So if you got a bond paying 9% relative to a GE bond paying 2%. Which one does you thinks the risk your bet? So these claims that involve corporate bonds I suspect again, some of these others have to do without the high risk corporate debt that would be out there.
The next one is preferred stock, similar take away, not all preferred stocks created equal.
Next one is options. That does get into a sort of a different, that one of if you don’t know what you’re doing options are ours risky regardless of whether, well there is maybe one option strategy that would not be considered risky, but still you have to know what you’re doing. So you know generally speaking I would I would not say that there are safe strategies out there. If your investing options and you don’t know what you’re doing that might be a red flag. Particularly if your portfolio is not performing, if you’re relying on a financial advisor who’s got this strategy and they’re telling you it’s safe, I would dispute that. There can be option strategies where you can be better protected but generally speaking options can be rapping up your exposure there. And so I think that I think that’s why you’re seeing claims involved with options is because, you know again, I think that for the most part you can you invest in stocks, rely on a financial advisor, but you don’t necessarily have to have this huge background in investing, but options is different.
Next one or next two variable annuities/limit partnerships. This sort of gets into my wheelhouse frankly; this is what a lot of our cases have to do with which is these products. They’re both very high commission investments, are generally illiquid, and what we see is that they are being pushed to retired investors who think that the basic function of the investment is to provide income. But when it stops providing that income you can’t sell it. It starts, stops having any value to you. So we have we have a bunch of claims involving those. But in terms of the FINRA statistic that one is little bit lower down on the list
So those are the basic things that were broken down in FINRA statistics and if you want to look at them in more detail you can go to FINRA website at F-I-N-R-A-.-O-R-G. That’s the topic for this week. I hope it was informative. If you’ve got questions for us visit us atWallStreetVMainStreet.com or tune in next week as we talk about discovery requirements if you bring a claim, what documents do you have to produce.
Producer: You’ve been listening to Wall Street versus Main Street. The views expressed by the participants of this program are their own and do not represent the views of nor or they endorsed by The White Law Group, its officers, directors, employees, agents, representatives, shareholders, nor any of its subsidiaries, none of the content should not be considered legal advice. As always consult a lawyer.
This transcription has been created by Dragon Software. There may be grammatical or translation errors. For clarification, listen to Episode 15 here.