This week, New York attorney general Andrew Cuomo announced a $23 million settlement with UBS Financial Services. Cuomo's office had accused UBS of pushing customers into fee-based brokerage accounts that cost them thousands of dollars. A couple of examples provided by the AG's office:• UBS charged a 91-year-old client more than $35,000 for just four trades over two years (approximately $8,800 per trade). This was approximately $33,000 more than the same investor would have paid in a traditional brokerage account.
• An 82-year-old account holder paid approximately $24,000 in fees in 2003 while making only one transaction.
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 advisor 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 advisor is motivated to help you grow your account, since 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. It's called "churning" where 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 advisors. A broker's primary function is to help you trade stocks or other securities. If a broker claims to be a "financial advisor," it does not make him or her an investment advisor. An investment advisor is qualified to give you financial planning advice such as retirement and estate planning.
• Brokers are held to different standards than investment advisors. Under state and federal law, generally, brokers are required to sell or execute investments suitable to your needs. Investment advisors, 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 advisor upfront if he or she is licensed or registered before making an investment. When a broker or advisor 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 advisors 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 advisor, comparison shop before opening an account. Brokerage and investment advisor 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.