What Is Stockbroker Misconduct?Summary: There are many ways in which clients can believe that they have suffered stockbroker misconduct. However, the majority relate more to old fashioned poor practice rather than deliberate malice. We look at some problems here. Firstly, it is worth pointing out that stockbroker misconduct is generally considered to be different to fraud. Fraud usually signifies an intent to harm or profit, whereas misconduct could often be better described as incompetence.
We have personally met individuals who in 2001/2 had portfolios which were down by 80% or more from the time of their investment in 1998/9. Of course, no person can tell the future, but any rational observer could have seen that this was a very high risk part of the market. Another way that stockbroker misconduct can harm clients relates to the investment and construction of portfolios for those on a limited or fixed income. Every so often, stories reach the daily papers of clients, often retired, who have had their life savings invested into a very high risk venture which they did not understand. For almost everyone, the correct approach is that of a portfolio containing a number of different asset classes. This might involve corporate and government bonds, property, cash, commodities and stocks. Such a portfolio will usually contain far less risk than one that simply contains stocks (or equities). A problem however, is that stockbrokers are not usually paid or targetted to sell assets other than stocks and shares. This means that the hard work of portfolio construction is left to the client. In the modern world of the internet and rapid exchange of information, many investors choose to use the services of an execution only stockbroker. This means that the client is completely responsible for the outcome of his or her investment. Under such circumstances, the stockbroker holds no responsibility.
An example of stockbrokers not acting in the best interests of their client is amply described in The Wolf Of Wall Street by Jordan Belfort. In the early 90s, his brokerage was probably the most aggressive on earth and his staff were the hardest of hard-sell brokers. The book goes into some detail to explain their insider trading, money laundering, behind the scenes deals and general manipulation of small stocks and IPOs. It isn’t pretty and will leave the reader wondering why stockbrokers ever had a good reputation! Also related to this subject is:
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