Finra Issues An Advisory About Brokerage Firm Financial Advisory Centers — What Investors Need To Know

• Posted on: Jan 30 2017

Call centers are nothing new to consumers.  Businesses, both large and small, use them to handle their telephone communications with new and existing customers. Brokerage firms also use call centers to service some of their customers – usually those customers with accounts having less than $100,000 – $200,000 in assets.

Some firms use financial advisory centers (“FAC”) to provide support for a variety of administrative and customer service issues, while others use call centers to accommodate self-directed investors. As in other industries, these firms use call centers to respond to incoming calls initiated by the investor.

Generally, FACs do not solicit investments – that is, they do not call the investor, do not recommend specific investments and, in many instances, do not receive commissions or other transaction-based compensation for selling investment products. Although many firms employ licensed representatives at their FACs, typically there is no fiduciary relationship between the client and the FAC representative.

However, there is growing segment of the industry, e.g., discount brokerage firms, that use call centers as a sales tool. These firms staff their FACs with securities professionals who may provide financial planning services, sell securities products, and receive commissions or other financial incentives for doing so. Often, these firms push their clients with small accounts to FACs without their consent.

In 2006, the National Association of Securities Dealers, the predecessor of the Financial Industry Regulatory Authority (“FINRA”), fined Merrill Lynch $5 million for steering clients into unsuitable mutual funds after those clients were reassigned from individual brokers to a call center. Merrill Lynch also improperly held sales contests to favor its proprietary funds and failed to supervise its call-center sales force.

On January 19, 2017, FINRA issued an investment advisory to investors about the use of sales-oriented financial advisory centers (here).

FINRA identified several concerns with these types of FACs.  Among the concerns expressed are:

• Aggressive sales tactics.
• Failure to gather customer suitability information.
• “Free” or “no fees” IRA rollovers.
• Unsuitable mutual fund switches (e., the transfer of money from one mutual fund owned by the investor to a new fund).
• “No cost” mutual fund switches, when the switch comes with higher annual fees and are subject to contingent deferred sales charges (“CDSC”).
• Misrepresentations and omissions of key information.
• Failure to disclose the availability of different classes of mutual fund shares and the different costs and expenses associated with each option.
• Inadequate supervision of call center representatives.

To address these concerns, FINRA recommends the following:

• Ask questions upon receiving a “welcome” letter or other notice that your account has been, or will be, transferred to a call center or investment center, including:
  • Will I have an individual representative assigned to me that I can contact? Will he or she know me, my account and investment experience and objectives?
  • Will my new representative be permitted to provide recommendations on all types of investments?
  • What services will I receive from the investment or call center? How will these differ from the services I previously received?
  • Will I pay the same commissions and fees for the services I receive?
  • Be wary of calls from FAC representatives that lead to recommendations to move money out of existing investments and into new ones, particularly into a firm’s own mutual funds or other investment products.
• If a particular investment product is being recommended, ask how the representative will be compensated.
• Use the FINRA BrokerCheck to make sure the brokerage firm and FAC representative are properly registered and to research the disciplinary history of the firm or registered individual.
• Make sure each representative understands your risk tolerance, financial circumstances, investment objectives, and any other information pertinent to the recommendation.
• Understand mutual fund share classes and the different costs and expenses associated with each.
• If a mutual fund switch is recommended, be aware of the fund’s name, investment objectives, and fees and expenses.
• Be suspicious of mutual funds that are outside of your existing fund family:
  • Ask if there is a similar fund within your existing fund family and the cost-if any-associated with such an exchange.
  • Ask for a side-by-side comparison of fees and expenses between your existing fund and the recommended fund.
  • Use FINRA’s Fund Analyzer to compare investment objectives, fees and expenses, including a CDSC schedule, and other fund information.

Takeaway:

FINRA’s investment advisory serves as an important reminder to customers: do your homework and be informed. Thus, customers should ask questions and be suspicious of anything that does not feel right; check the FAC representative’s disciplinary and employment records; ensure that any investments made comport with investment objectives and risk tolerances; read confirmation statements and account statements; understand the costs of the investment products; and know how the FAC representative will be paid. Above all, investors should not hesitate to complain when things don’t look or feel right. If something does not make sense, customers should ask the FAC representative and/or manager about the issue. If the customer remains unsatisfied, s/he should file a complaint online at FINRA’s Investor Complaint Center.  Customers can also seek the advice of an attorney. Finally, customers can transfer their account to another brokerage