July 23, 2007 — -- New York Attorney General Andrew Cuomo announced a $23 million settlement with UBS Financial Services last week. Cuomo's office accused UBS of pushing customers into fee-based brokerage accounts that cost them thousands of dollars.
A couple of examples provided by his office:
As part of the settlement agreement, UBS did not admit liability, but did agree to pay restitution to customers. So you may well wonder, could my broker or financial adviser be overcharging me?
First, let me clear up one thing. There is nothing wrong with fee-based brokerage accounts. They can be a great deal for the right customer — namely somebody who makes a lot of trades.
Here's how they work: Each year, the firm charges you a small percentage of the value of your account. You get unlimited trades and you're supposed to receive expert advice. Theoretically, the broker or adviser is motivated to help you grow your account, because their compensation is a percentage of it.
But if you make very few trades, a traditional brokerage account is better for you. In traditional accounts, you are charged a commission only when you make a trade. You should be aware that unscrupulous brokers have found a way to take advantage with this kind of account too. In a process known "churning," they make all sorts of unnecessary or unwanted trades to generate commissions for themselves.
The New York attorney general's office offers these tips to help investors protect themselves:
Brokers are not investment advisers. A broker's primary function is to help you trade stocks or other securities. If a broker claims to be a "financial adviser," it does not make him or her an investment adviser. An investment adviser is qualified to give you financial planning advice such as retirement and estate planning.
Brokers are held to different standards than investment advisers. Under state and federal law, generally, brokers are required to sell or execute investments suitable to your needs. Investment advisers, however, have a legal duty to give you financial advice solely in your best interests and in all aspects of the business relationship.
Registration requirements apply to both. Ask the broker or investment adviser upfront if he or she is licensed or registered before making an investment. When a broker or adviser is not registered or licensed, that is a sure sign something is wrong. Remember, brokers are regulated by the National Association of Securities Dealers, and investment advisers must register with the Securities and Exchange Commission.
Comparison shop before making a decision. When you are making decision as important as choosing your broker or investment adviser, comparison shop before opening an account. Brokerage and investment adviser fees vary and may be negotiable. Ask what services you are getting, what you are paying for and whether you will be paying a commission per trade, or a fee based on your assets, or both.