Assessing honesty of brokers not easy

By John F. Wasik
Bloomberg News Service

CHICAGO — Finding out how securities brokers treat customers is a difficult process, largely because the industry is its own watchdog and screens out negative broker reports.

This creates conflicts for those who might entrust their life savings to a particular brokerage firm.

The National Association of Securities Dealers Regulation Inc. provides some broker information through its public disclosure program.

The group is the independent regulatory subsidiary of the National Association of Securities Dealers Inc., an organization of more than 680,000 securities representatives and firms.

That database, however, is incomplete. It does not include court-ordered arbitration settlements, court decisions and customer complaints.

Much of what is being removed by the National Association of Securities Dealers Regulation is public record, according to Joseph Borg, president of the North American Securities Administrators Association, an organization of state-level regulators.

Securities lawyer Edward Siedle recently sued the National Association of Securities Dealers to ensure his right to publish publicly disclosed brokerage-firm information in his book "The Siedle Directory of Securities Dealers."

"Only 15 percent of arbitrations against brokers and one-half to one-third of regulatory actions are publicly disclosed to the public by NASDR," Siedle said. "This is one of the most outrageous conflicts of interest in financial services."

Nancy Condon, a spokeswoman for the securities dealers association, however, insisted that Securities and Exchange rules and statutes limit what the industry can disclose. Generally, consumer complaints are screened out if they are more than two years old. The industry also screens out brokerage firm bankruptcies more than 10 years old and a variety of unsatisfied judgments or liens.

Reports that do appear are mostly arbitration cases. This is partly because customers of association members must agree to resolve disputes through arbitration — in forums mostly owned by the securities industry — instead of lawsuits.

This process can make a firm's customer-relations history even more misleading. Marvin Roffman, a Philadelphia-based securities arbitrator and investment adviser, said he's found that 90 percent of all cases against brokers will settle before arbitration.

"Brokers will settle if they think they are going to lose," Roffman said. "When you see an arbitration claim against a broker, it's just the tip of an iceberg."

If investors want information, they can turn to the states. State securities regulators generally provide information to investors on brokerage-house complaints and actions, and unlike groups like the National Association of Securities Dealers Regulation, are under no obligation to protect the industry. State regulators' information can be accessed the group's Web site.

Even the U.S. Securities and Exchange Commission, which oversees the National Association of Securities Dealers, concedes there's more information on brokerage houses through state securities agencies. You can find the SEC's guidance online.

In addition to the government agencies, Weiss Ratings Inc. — a consumer-rating company — has attempted to rate brokers on the basis of publicly disclosed information. The Palm Beach Gardens, Fla.-based company analyzed data from the National Association of Securities Dealers Regulation on 612 brokerage firms as well as 13,232 arbitration and regulatory actions between 1997 and 2001. Weiss then calculated each firm's number of actions per million customer accounts.

The five firms with the largest number of actions among the 18 largest retail brokers in the survey were Prudential Securities Inc.; Ameritrade Inc.; U.S. Bancorp Piper Jaffray Inc.; E*Trade Securities Inc.; and Raymond James & Associates Inc.

However, these brokerages have challenged the accuracy and methodology of the Weiss study, noting that it doesn't include the total number of arbitrations and settlements.

Others considerations in searching for a client-friendly brokerage would be to avoid brokers who offer investment advice and to work with fee-only certified financial planners, who do not receive commissions.