The Broker's Dilemma: Putting the Client First or Being a Team Player
There is a long-perceived natural tension that exists between the challenging goals of revenue production, adherence to compliance and effectively serving the customer's interests. These competing forces do not necessarily have to be in conflict. Well-run organizations and dedicated sales staffs find the correct balance, identifying proper products for the appropriate customer and generating fair returns for all of the participants to the transaction—the firm, the broker and the customer.
It is only when a party's interests are diverted from this path that problems arise. Unfortunately, there have been occasions when a broker/dealer or registered representative wandered off the path of righteousness and pursued a personal agenda to the detriment of the customer. These problems may arise as a consequence of the sales of proprietary products, such as mutual funds, annuities and private placements, or distributions in which the firm is an underwriter. Improper activities have led to regulatory sanctions against firms for tying special incentives, such as trips, cash and goods to sales of the firm's proprietary products when non proprietary products were as good, if not better and cheaper, than the product touted by the firm and the sales personnel. Sanctions have also been made against individual reps for violations of the “Know Your Customer” rule.
It will generally not suffice for a broker to assert that she was just following orders when she sold what is an allegedly unsuitable investment to the customer. That defense hasn't worked before NASD arbitration panels in the past, and it will probably not work in the future, either.
The customer's interests must be paramount. That much we can all agree on. Clearly, if the product were inferior, the broker would not sell it, and if she were hounded by management to sell it anyway, she would leave the firm. But let's proceed on the assumption that the product that the firm seeks to market is not defective in some sense. Rather, let's assume for the purposes of this discussion that the firm's product provides features, rates of return and fees and costs comparable to the competition.
If the product is truly competitive as an investment, all things being equal, there may be strong reasons why a proprietary product would best serve the interests of a customer, as well as the collective interests of the firm and broker. First, if the firm is sponsoring the product, it is expected to have an in-depth familiarity with the product and a reasonable expectation regarding how it will react to various market conditions. Since the firm stands behind the product, it will be motivated to provide a ready and stable market for it and to maintain its competitive position by dint of performance and fees. Second, unless the account is “overloaded” with any one company's products—especially products that would make the account illiquid or subject to high surrender costs—or is not properly diversified by sector, then there is no reason to avoid proprietary product. A broker who is meeting his or her duty to the customer will have offered the customer various alternatives, including the proprietary product, and can justify the recommendations made. Then, it's up to the customer to decide. The firm would be on very thin ice legally if it were found to have “intimidated” its brokers into pushing its product over another that was better or, worse, retaliated against a broker for acting on her conscience.
It might be advisable for a broker to put in writing the basis for your recommendations. Contemporaneous notes may act as an insurance policy, reflecting why a particular recommendation was made at an earlier time. This document may be valuable in the event the broker gets into a scuffle with the firm regarding her “loyalty” or subsequently, with an aggrieved customer, who attacks the recommendation because he was sold a proprietary product that failed to perform to expectations.
In the end, go with your instincts. It's your license and reputation that are at stake. Once they're tarnished, they're hard to restore. If the product isn't right for the customer, don't sell it.
