For the past few months, Long Island, NY-based David Lerner Associates has been advertising on CNBC with some pretty aggressive claims and customer testimonials. Were I not of the cynical, skeptical variety, I could see myself being quite intrigued by the commercials, which portray customers heaping nothing short of the highest praise for the investment performance and service they've received from Lerner. Now, EVERY broker/dealer gets fined and subject to arbitration for Regulatory violations, customer complaints, etc, that's just the nature of the business, but that's another conversation for another time. Let's use DLA as an example for how retail investors can and should protect themselves:
Investors really, really, really should learn how to use FINRA Brokercheck before entering-into a relationship with a new broker. Look up both the individual broker(s) and the firm. As an example, I pulled-up David Lerner Associates' report, and it shows 13 Regulatory Events (censures & fines) and 14 arbitrations. You can read all the fun details, like the several fines in the $50,000-$100,000+ range over the past 10 or so years for shady sales/marketing/disclosure practices. Most of the arbitrations are for things like lack of suitability, breach of contract, failure to supervise, fraudulent activity, and misrepresentation. These things all sound really bad but in each of the arbitration cases, the amounts awarded were far less than the amounts requested by clients, indicating (depending on what you think about FINRA) that either the client complaints were overstated and/or that FINRA exists primarily to protect it's member firms, not their clients (again, another conversation for another time.)
There is 1 pending Regulatory investigation from the middle of 2010 that's still ongoing that caught my eye. It accuses DLA of taking excessive and unwarranted markups on muni bonds ranging from 3% to almost 6% (this is really high!), and markups on CMO (Collateralized Mortage Obligations) ranging from 4% to almost 13% (this is seriously out of control!). The majority (if not entirety) of the securities sold to clients are alleged to be from DLA's own inventory, which would mean their cost of obtaining these securities was minimal (legalese: de minimus), and best, because of the way securities regulations work, these markups are NOT disclosed to clients, rather they are simply added to the price the client sees on their trade confirms. This is a practice I think needs to be made absolutely illegal, but again, that's another conversation for another time.
DLA, of course, "vigorously denies these allegations, believes its claims to be unfounded, and expects to be completely vindicated upon the conclusion of the process." If there is any truth in the FINRA allegations that DLA is/was engaged in the practice of selling products out of inventory with ridiculously high, undisclosed markups, that is a MAJOR red flag. There is no reason for a firm to charge markups on vanilla fixed income products anywhere close to the range the FINRA claims allege. Seldom have I heard of markups on ANY product, including structured ones, higher than 3%. 5% for a muni bond is absolutely nuts and 12% for a CMO, I don't think I can imagine a scenario where that'd be even remotely appropriate.
Look, I'm not saying David Lerner Associates is a chop shop or accusing any individual broker(s) there of being scumbags. There's bad apples and oversights at EVERY firm eventually, it happens (in every industry, so don't just pick on financial services). Also, this most recent FINRA investigation is still un-settled, so we'll what happens when all is said and done. Clients should buy into brokers' hype with a very, very skeptical eye. Brokers, by definition, are out to make money off you; they do not have a fiduciary responsibility to you, as opposed to financial advisors, who do. Know the difference.
When you're lured-into an investment seminar - which is really a sales presentation - be wary of promises that seem a bit too good to be true. The vast majority of retail investors should have ZERO exposure to CMO's or the type of REIT's DLA sells. There's nothing wrong necessarily with owning munis or many of the other type of securities DLA hawks, but were I buying any fixed income securities from them, I'd get a quote from at least one other shop/service before so doing.
No one has your best interest in mind more than you do. Act like it. Caveat Emptor.
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