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Caveat Emptor, David Lerner Associates Edition
For the past few months, Long Island, NY-based David Lerner Associates
has been advertising on CNBC with some pretty aggressive claims and
customer testimonials. Were I not of the cynical, skeptical variety, I
could see myself being quite intrigued by the commercials, which
portray customers heaping nothing short of the highest praise for the
investment performance and service they've received from Lerner. Now,
EVERY broker/dealer gets fined and subject to arbitration for
Regulatory violations, customer complaints, etc, that's just the nature
of the business, but that's another conversation for another time.
Let's use DLA as an example for how retail investors can and should
protect themselves:
Investors really, really, really should learn how to use FINRA Brokercheck
before entering-into a relationship with a new broker. Look up both
the individual broker(s) and the firm. As an example, I pulled-up David Lerner Associates' report,
and it shows 13 Regulatory Events (censures & fines) and 14
arbitrations. You can read all the fun details, like the several fines
in the $50,000-$100,000+ range over the past 10 or so years for shady
sales/marketing/disclosure practices.
Most of the arbitrations are for things like lack of suitability,
breach of contract, failure to supervise, fraudulent activity, and
misrepresentation. These things all sound really bad but in each of
the arbitration cases, the amounts awarded were far less than the
amounts requested by clients, indicating (depending on what you think
about FINRA) that either the client complaints were overstated and/or
that FINRA exists primarily to protect it's member firms, not their
clients (again, another conversation for another time.)
There is 1 pending Regulatory investigation from the middle of 2010
that's still ongoing that caught my eye. It accuses DLA of taking
excessive and unwarranted markups on muni bonds ranging from 3% to
almost 6% (this is really high!), and markups on CMO (Collateralized
Mortage Obligations) ranging from 4% to almost 13% (this is seriously
out of control!). The majority (if not entirety) of the securities
sold to clients are alleged to be from DLA's own inventory, which would
mean their cost of obtaining these securities was minimal (legalese: de
minimus), and best, because of the way securities regulations work,
these markups are NOT disclosed to clients, rather they are simply
added to the price the client sees on their trade confirms. This is a
practice I think needs to be made absolutely illegal, but again, that's
another conversation for another time.
DLA, of course, "vigorously denies these allegations, believes its
claims to be unfounded, and expects to be completely vindicated upon
the conclusion of the process." If there is any truth in the FINRA
allegations that DLA is/was engaged in the practice of selling products
out of inventory with ridiculously high, undisclosed markups, that is a
MAJOR red flag. There is no reason for a firm to charge markups on
vanilla fixed income products anywhere close to the range the FINRA
claims allege. Seldom have I heard of markups on ANY product,
including structured ones, higher than 3%. 5% for a muni bond is
absolutely nuts and 12% for a CMO, I don't think I can imagine a scenario where that'd be even remotely appropriate.
Look, I'm not saying David Lerner Associates is a chop shop or
accusing any individual broker(s) there of being scumbags. There's bad
apples and oversights at EVERY firm eventually, it happens (in every
industry, so don't just pick on financial services). Also, this most recent FINRA investigation is still un-settled, so we'll what happens when all is said and done.
Clients should buy into brokers' hype with a very, very skeptical
eye. Brokers, by definition, are out to make money off you; they do
not have a fiduciary responsibility to you, as opposed to financial
advisors, who do. Know the difference.
When you're lured-into an investment seminar - which is really a
sales presentation - be wary of promises that seem a bit too good to be
true. The vast majority of retail investors should have ZERO exposure
to CMO's or the type of REIT's DLA sells. There's nothing wrong
necessarily with owning munis or many of the other type of securities
DLA hawks, but were I buying any fixed income securities from them, I'd
get a quote from at least one other shop/service before so doing.
No one has your best interest in mind more than you do. Act like it. Caveat Emptor.
- advertisements -
Umm, looks like this shady actions finally caught up to him, http://www.investorclaims.com/blog/david-lerner-associates-in-trouble-fo.... David Lerner Associates history of FINRA violations is well known.
I am not taking the brokers side on this, but I think the mark up is form the cost, and not the market value, so if the firm bot the bonds cheap and held them for a while and the bonds appreciated, then the mark may look more than it really is.
I suppose what you're saying is possible, but that wouldn't be booked on the internal trade tickets/OMS/TMS as a markup, so I think the only way what you're suggesting is possible is if DLA's systems/controls/audits are garbage-to-non-existent. Neither is good.
I'd be curious if DLA comes out of this and can prove itself entirely innocent here after reading the complaint, unless FINRA jumped to a conclusion before doing proper diligence, which, again, I suppose is possible.
At a former employer I saw brokers take markups (marked-up from the ask on the buy or subtracted from the bid on a sell) that were usually under 100bps for vanilla products, although saw some in the 200-300 range for more esoteric products. Unless the FINRA complaint is based off very poor data and/or has no idea wtf they're talking about (possible), DLA was seriously out of line taking such markups.
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