Financial advisors are keenly aware of the concept of leverage. The use of debt, options, and margins can be a crucial component to generating wealth for their customers. Leverage can mean the magnification of returns that were otherwise unable to be achieved. Likewise, leverage can magnify and expand downside risk to a client and should be monitored closely.
There’s another form of leverage that is commonplace in the financial industry that a broker should monitor as well. With the advent of FINRA's BrokerCheck site, and the subsequent ruling forcing all FA web profiles to link directly to BrokerCheck, advisors need to understand that this site can also magnify their results – good or bad.
For those brokers with zero customer dispute or U5 termination disclosures listed, this site can help to underscore their reputation both among investors and B/D’s alike. A “clean BrokerCheck” can maximize their rate of landing new client prospects and will afford them the full range of firms to transition to. Conversely, a BrokerCheck profile littered with customer complaints or Employment Separation After Allegations disclosures can throw up a red flag for both new clients and potential suitor B/D’s.
When these Form U4 disclosures are valid and with merit, they can serve as an important function to assist self-regulation. However, some broker-dealers will abuse these two types of disclosures to actually generate leverage against a broker. B/D leverage will typically take one of two different forms.
Firstly, a firm may use current customer dispute disclosures to retain a broker beyond his or her intentions. Saddling them with meritless allegations, and unwilling to help expunge them, a broker-dealer can leverage these disclosures to keep a broker around as long as possible. It becomes easy for a firm to argue and demonstrate that, even if meritless, these disclosures of investors complaints brand the broker with a sort of Scarlet Letter in the industry. Unable to move firms, the B/D achieves the equivalent of “golden handcuffs” without having to provide the gold.
The second most common form of B/D leverage manifests when a broker, with or without current disclosures, decides to make the leap to a new firm. Now, instead of being utilized to keep the broker in-house, the broker-dealer will drum up customer disputes and U5 disclosures to try and disparage the broker to retain his or her clients. Within the matter of a couple months, a broker with a previously clean record, will have several customer complaints and a termination disclosure citing multiple infractions of company policy. This is the proverbial “twisting of the knife” on the way out.
It’s funny how a broker can go from a valued employee to a scapegoat overnight.
AdvisorLaw is the only firm that represents only the Advisor.
We know how to get these meritless claims of customer disputes and terminations expunged, likely with monetary damages against your previous firm. Call us to discuss how we can decrease the leverage that your current or previous firm has against you.
Protect Your Livelihood.
Senior Business Development Manager
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This blog is our ongoing effort to inform and educate FINRA licensed professionals about the evolving regulatory ecosystem in which we operate.