The Derivative Project

FINRA Survey Identifies Rampant Fraud by “Advisors”: SEC, FINRA – Look In the Mirror

FINRA Survey Identifies Rampant Fraud by “Advisors”: SEC, FINRA – Look In the Mirror

The FINRA Investor Education Foundation released a September 2013 study, Financial Fraud and Susceptibility in the United States, on rampant fraud in the retail investment arena, where 1 in 4 retail investors have been subject to fraud.  The executive summary of this survey states:

1. The ubiquity of fraud solicitations, coupled with the inability of many people to recognize the red flags of fraud, place a large number of Americans at risk of losing money to scams—with older Americans at greatest risk.
2.  Financial fraud solicitations are commonplace. A new survey by the FINRA Investor Education Foundation found that more than 8 in 10 respondents were solicited to participate in a potentially fraudulent offer. And 11% of all respondents lost a significant amount of money after engaging with an offer.”
A Table (highlighted below) from the FINRA Survey indicates, ironically, many of the most common sources of fraud are standard practices today by the bulk of “financial advisors”.  Sales techniques, masquerading as “education” in the form of free lunch sales pitches and cold calls are common place techniques endorsed by every large “financial planning firm”, including SEC registered investment advisors (RIA’s) and all major brokerage firms today.
Free educational seminars offered by “advisors” in the workplace to employees, are one of the most common ways for “advisors” to pitch their product.  Employees are invited to an “educational” seminar.  It is not an educational seminar.  It is a misleading sales tactic to lure employees into a “seminar”, then a “free-consultation” and then a sales pitch to sell a product that is in the best interests of the advisor, not the employee.
Why can’t consumers distinguish between a “good advisor” and a “bad advisor”?  Having worked in the financial services industry for decades, in addition to the personal finance sector, the answer is clear:  This industry is rotten to the core.  There is no way to distinguish between a good actor and a bad actor.  There are no industry standards and performance measurement tools to aid the retail investor to begin to distinguish between the good and the bad actors.
FINRA Foundation 2013 Financial Fraud Survey
There is indeed a retirement crisis. Americans are rapidly losing their life savings to not only fraud, but excessive fees and poor performance due to the lack of performance measurement tools.
Can one fairly compare the results of this survey’s “rampant fraud” to the players in the “advice” industry today?  Yes, it is the industry that has created the environment to allow this crisis level of fraud to permeate the retail investment sector today.
Retirement Crisis 101  - The Roots of the Crisis
  • FINRA has allowed an “advice” industry to thrive in the shadows by prohibiting any retail retirement investor from filing a claim in the U.S. Court system.  Every fraud, scam and securities law breach in an IRA today is subject to mandatory arbitration.  FINRA writes the rules and enforces their rules to benefit the financial services industry.  The result: rampant fraud that never sees the light of day.
  • The SEC bows to every request by the financial services industry and refuses to give an inch to bring the roots of the retirement crisis to light by the simple appointment of the Dodd-Frank mandated SEC Investor Advocate office, a law,  a congressional mandate created over three years ago.  Why?  Read here:

Presentation to SEC Commissioners December 3, 2010 by The Derivative Project


“Annette Nazareth, a former SEC Commissioner who is now a securities lawyer for Davis Polk, according to a Freedom of Information Report by Bloomberg, Business Week, influenced SEC Chairman Shapiro. Nazareth’s communication with the agency was extensive, “Nazareth’s messages asked for meetings, offered her firm’s products and opined on the debate in Congress. She…wrote that the prospect of a consumer finance protection agency made her “feel ill” and that she’d asked SIFMA, the Wall Street trade group to “trash” a proposal for a investor advocacy office at the SEC.”

  • The SEC has never enforced administrative proceedings against a registered investment adviser who has breached its fiduciary duty against an IRA investor.  The IRA investor has no right of private action. The fraud, the deceit and the breach of securities laws are allowed to continue in the shadows.
The Answer to End the Fraud
Due to the regulatory capture and  the powerful financial services lobby, there is but one answer to alleviate the plight of the retail retirement saver today. The Answer combines three key elements:
  1. Workplace education provided by bona-fide, independent practionners, with no ties to the financial services industry
  2. The tools provided to every retirement saver to analyze any proposed investment
  3. An understanding by the retirement investor of the scope of the fraud created by financial intermediaries today.  A national PR initiative, such as that to end smoking, to alert every American to the dangers of every financial intermediary and the benefits of taking charge, is long-overdue.
The current debate at the Department of Labor and the SEC on advisor “fiduciary standards” is a complete waste of time and taxpayer money. Fine print contract disclosures on conflicts of interest allowed by the SEC and dual registration of brokers and RIA’s says it all.  There are no fiduciaries in the retirement advice market and modifications in the current advisor structure and industry cannot change that.
The only solution is to provide retail investors the proper tools, benchmarks and education to make a determination, on their own, on what investment is in their best interest.  It is a simple vision, that is indeed possible, with the prevalence of online technologies today.
“Tell me and I forget, teach me and I may remember, involve me and I learn.”
–Benjamin Franklin