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Uncoiling the Secret Agenda from your Broker-Dealer's Move

We had a case in which a widow entrusted nearly all her retirement money to an investment advise. At one point, the adviser decided to switch his career path and join a hedge fund. And he encouraged the woman to put her savings into the hedge fund. As it turned out, the hedge fund had a highly risky business plan, and her savings evaporated.

The case, Hays v.  Ellrich, 15-11743 (Mass. 2015), went all the way to the Massachusetts Supreme Judical Court, which found in her favor., so justice was served.

But all of this might have been avoided under a new FINRA rule approved by the SEC this month. Now, whenever a broker leaves for another firm and tries to take clients along, FINRA requires that the broker send an educational communication to the client. That pamphlet outlines the client's rights and prompts the client to ask probing questions of the broker:

  • Could financial incentives create a conflict of interest for your broker? 
  • Can you transfer all your holdings to the new firm? What are the implications and costs if you can't? 
  • What costs will you pay — both in the short term and ongoing — if you change firms? 
  • How do the products at the new firm compare with your current firm? 
  • What level of service will you have?

All of these are good questions to ask and will help an investor uncover hidden information when a broker makes a move.

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