Kilian Berz, an analyst with The Boston Consulting Group, was incorrectly referred to as "she." Berz is male. The text below has been corrected.
Stocks Go Down, Complaints Go Up
Sunday, May 10, 2009
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 to formally accuse their 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, a non-governmental regulator of securities companies, soared 86 percent in the first three months of this year after climbing nearly 54 percent in 2008. New cases during the period totaled 1,715. Adding in April's figures, FINRA projects that filings are on track to hit 7,000 this year, up from 4,982 in 2008.
"I don't anticipate it slowing down this year or next," said Linda Fienberg, president of dispute resolution for FINRA. She added that investors are prevailing in more of the cases brought this year than they had in the past 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. That's followed by 758 cases of alleged misrepresentation and 631 cases claiming negligence.
She said that the tally tends to run in the opposite direction of the stock market: When stocks go down, complaints go up.
FINRA has received a lot of complaints from investors who say advisers 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 the Boston Consulting Group, an international business advisory firm, only 22 percent of American consumers said they trust investment advisers to protect their assets.
"When assets decline 30 or 40 percent in value, you realize there are few active advisers who have actually been able to make a difference in terms of performance relative to the market," said Kilian Berz, a BCG partner and managing director.
Berz said all financial institutions -- but particularly investment advisers -- will have work to do when the markets recover. "Trust has been fundamentally broken, and confidence is much lower than it was," he said. The investment specialists were unable to protect their clients, he added.
Nonetheless, consumers surveyed were split over their attitudes toward stocks. Thirty-five percent said they would never invest in stocks to the level they had in the recent past, while nearly an equal share, 32 percent, said they would resume investing in stocks as soon as they saw clear signs of a market rebound. Berz said those numbers reflect different types of investors. The never-again group may be retirees who realize that they had too much risk in their portfolio and are making a permanent adjustment. The latter group may be younger investors with a greater appetite for risk.
Certified financial planners, who advise clients on their overall financial picture, including spending levels, insurance coverage and retirement planning, haven't emerged unscathed. Diahann Lassus, chairman of the National Association of Personal Financial Advisors, said she thinks the overall number of clients dropping their advisers through this downturn has been very low. But, she said, "most of us have lost at least one during this craziness."
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 adviser, 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.
In particular, the financial planning coalition wants to make sure that FINRA not be made their new regulator.
"In the wake of the financial crisis and with the widespread distrust in Wall Street, now more than ever the public needs to know that those who offer financial advice are competent, ethical and committed to the best interests of their clients," the coalition said in a published statement.