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Investor anger over portfolio advice shows in case filings

Formal complaints to the Financial Industry Regulatory Authority soared 86%, to 1,715, in the first three months of this year.

July 13, 2009|Elizabeth Razzi

A lot of investors are blistering mad, not only about the sorry state of their portfolios but also about the investment advice they got on the way down.

Their discontent drives a search for scapegoats -- someone to blame for lost wealth. But it goes even deeper: Many investors are finding grounds for formally accusing brokers and dealers of bad behavior.

The backlash against the investment professionals is so sharp that in recognition of public outrage, the financial planning industry is asking Congress to create a national organization to regulate its ranks.

The numbers illustrate the outrage. New arbitration cases filed with the Financial Industry Regulatory Authority (FINRA), a nongovernmental regulator of securities companies, soared 86%, to 1,715, in the first three months of this year after climbing nearly 54% in 2008. Adding in April's figures, FINRA projects that filings are on track to hit 7,000 this year, up from 4,982 last year.

"I don't anticipate it slowing down this year or next," said Linda Fienberg, president of dispute resolution for FINRA. She added that investors were prevailing in more of the cases brought this year than they had in the last few years.

The top complaint is breach of fiduciary duty, which requires a representative to act in the best interests of a client, with 946 cases filed through March.

FINRA has received a lot of complaints from investors who say advisors put their money into auction-rate securities, which are bonds whose interest rates are set periodically at auction.

"Individual investors had their funds put in auction-rate securities, allegedly having been told these were as safe as a cash equivalent, such as a money market fund," Fienberg said. "In February 2008, that market froze."

Suddenly, investors weren't able to retrieve the investments that they had believed were as accessible as cash.

In a March survey by Boston Consulting Group, an international business advisory firm, only 22% of American consumers said they trusted investment advisors to protect their assets.

"When assets decline 30% or 40% in value, you realize there are few active advisors who have actually been able to make a difference in terms of performance relative to the market," said Kilian Berz, managing director of BCG.

Investors' dissatisfaction is affecting the debate over who should even be allowed to call themselves financial planners. Now, practically anyone can claim to be a financial planner or advisor, even if they lack credentials such as the Certified Financial Planner designation, which requires formal study and passing an examination.

In April, a coalition of planning groups asked Congress to set up a national organization to oversee their industry and to hold planners to the strict fiduciary standard of care.


Razzi writes for the Washington Post.

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