Maybe this is why mother Fidelity is getting so goosy about the purchase and sales of preferred shares.
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Brokerage Firms Fined On Preferred Stock Purchases/Sales
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12/30/2024
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So….
1. You bought new issue 4.5% at 25. Two months later its 26.75. You sell and make 1.75 less commission. Net 26.5…UP 6%
OR
2. You bought same 4.5% new issue. Waited 366 days and sold it for 18.00. Down 28%
WHICH TRADE IS UNSUITABLE according to this rule????
This was churning. Plain and simple.
If you sold for a big profit…Is that churning?
According to Investopedia:
Churning is the illegal and unethical practice by a broker of excessively trading assets in a client’s account in order to generate commissions.
Also from Investopedia:
Churning may result in substantial losses in the client’s account. Even if the trades are profitable, they may generate a greater than necessary tax liability for the client.
I don’t know how to highlight or bold on here, so I will repeat: “Even if the trades are profitable…”
I think the point here is that they were churning to boost their own profits without regard for the client.
You will notice they specifically do not say churning…..It’s about ‘short term trading’ in securities they deem should not be ‘traded short term’.
I’ve been told some of the biggest firms consider that any holding period less than one year for corp securities/pfds.
The holding period was secondary. These do not appear to be exchange traded, but internally offered securities that function more like UIT’s.
They were buying them and then selling them immediately after the eligibility window opened, and then buying a closely related product. and then rinsing and repeating.
The market price was either NAV, or a bid/ask where the group of investors were solely clients of that firm, but the commissions on each side seems to be sizable. (like 2% of the trade value)
You all are missing the point.
Its ALL about holding periods. Regulators have decided that short term pfd trades are unsuitable. Has nothing to do with your gain or loss……up/down. Syndicate, new issue, commission based, no commissions. Flat fee accounts.
Its funny they mention ‘at a loss’….because if investor was up8% in two months they would still say that trade in unsuitable. Which highlights my big assertion that they’ve lost their way. You know its suppose to be Best Interest. I think they need to re-examine themselves
Looking in the mirror is strictly prohibited in Washington, DC.
Given what bloodsuckers they are when it comes to taxes, most of them wouldn’t have a reflection anyway.
So I’ve always been an IT guy, but for 15 or 16 years I had a couple securities licenses (7 and 24) and had 10 or 20 or so clients, which I eventually gave up. Anyway, I’ve always managed my own accounts, obviously, but if I mess it all up can I sue myself?
So next up? 100% owner initiated trades. The computers may prevent clients from doing the short term trade as well. The machines ‘know’ its unsuitable. Based entirely on holding periods. Which gets us back to my main Q as to How do you define Unsuitable?
So…WHAT is a ‘unsuitable trade’. You’ll notice the article doesn’t attempt to define that? WHY?? If it’s valid enough to charge a firm w violations cant they at least articulate what they are saying?
I’ll break it down for you. If its less than a specified holding period….its unsuitable!!
I’ve been told it has nothing to do with clients profit or loss. So say you bought a 4.5% at par and it went to 26.75 in two months. Gee that’s 7% in 1/6 of a year!! Thats 1 1/2 years of interest in 2 months….or 43% annualized!!!!! You’d be reasonably certain that selling 26.75 was in everyones ‘best interest’ yes????
Wrong!
Now say it went to 15.00 in another 10months. Now you were in a year. Down 40% but you made 4.5%….How would they feel about selling now, down 40%? Guess what you are AOK compliance review wise.
So up 7% bad, down 25.5% good.
I want anybody here to explain making money is bad but losing money is good from a compliance point of rational. Which goes back to my first question, how do they define that???
Ifyouprefer,
You might take a look at the broker’s disclosure under Broker Check. That will contain details of the disclosure. I have not looked but you prompted me to look later on.
Ok I read the Finra release and it talks about “causing clients to sustain losses.”
It still amazes me that customers think a broker is anything more than a salesman. There are a few who understand how to read financials, but I’ll give you an example.
I have a fraternity brother who is at the successor to Smith Barney. He has a degree in finance from Univ of Texas,
He’s never moved firms because he can’t . He and his firm have paid out several million $ over his career for recommending unsuitable securities. Yet, they have kept him on.
This broker recommended Teligent Corp bonds to me at 10% yield around 1999 or 2000. I was successfully trading stocks for a few years and did not have time to look into the bonds, but gave him the go-ahead to buy $25000 at par because his exact words were “they are solid, the CEO came from AT&T.”
To shorten the story the bonds went to zero within a year. He had numerous settlements over Teligent and other companies.
I never let him recommend anything since that point, but I have used him on and off for stuff where his firm was leading the syndicate.
I don’t file arbitration claims because having been a trader for 25+ years, having been registered in the “industry” and having an accounting degree, it would be a very tough road.
I’m told that doctors and lawyers almost always lose arbitration claims because they have trouble claiming a lack of sophistication.
LT I feel for you. Thanks for being on this board and sharing.
Every financial advisor I talked to thinks what I am doing is wrong. Quite honestly I agree with them in a way as it’s a lot of work looking at individual stocks and watching over them like a protective mother hen. It’s old school and who’s to say it’s any better than the modern approach of spreading the risk out with just being in ETF’s and a few Bond funds.
It’s a trend, and it’s actually being reinforced by the brokers and the regulators. It’s also easier for the advisor companies as it is easier to hire inexperienced employees and less training with using programs that do the recommendations. They can handle a larger client base also.
Admit it. It does work. The trend is your friend. Until it’s not.
I am not making the big annual returns I see with just owning the Mag 7 or a S&P 500 fund. My time horizon is shortened as I have a expiration date so I am not as risk on as I used to be.
Thursday was just a hiccup. I actually expected Friday to be down as traders would be risk off over the weekend. I forgot about the holiday and the shortened trading next week.
Compare the volume on the 19th to Friday. So I took a risk and bought a couple things Thursday. Definitely nothing at fire sale prices as when a good panic has the herd throwing the babies out with the bathwater. I read the post on here about IIPR and looked it up. The risk is definitely not in my wheelhouse even with the preferred.
So what? You could have had enron bonds. Worldcom. AOL. Or….fannie made/freddie mac prfds. Things crater/die.
If your advisor wasn’t working on what’s best for you, then leave. I’d say most long term advisors work 100% for the clients. Its called fee based and they aint making money unless you do!!1
IYP,
I had all of those. Enron preferred at $2500 par..that was my favorite.
I was trading my account as well as a joint account for the CEO of the firm where I received a profits cut with no risk, so I bought 1 million Enron in a 5 minute period the day before bankruptcy. The stock went up 400 % on the day of the filing, my greatest nonsense trade ever. I had sold up 150%. CEO called from vacation to ask why I had not held.
IIPR Preferred A stock is on sale due to PharmaCann default.
Standing on the soap box…..
FIDO should not carry flim flammy bonds as IG and sell them to their customers. Their bond inventory was filled with the known numnutz (PSEC) as IG. Guess what? They all got pulled from the IG list. Buh Bye. Nothing to see here!
Stepping down from soap box….
PSS The article talks about unsuitable trades. They will NAIL you for this EVERY time. The compliance department had to be looking the other way or asleep at the wheel?
I skimmed the article. This sounds like money mgmt people cycling people’s portfolios to generate fees. It really does not matter what was traded as long as their 2% cut was involved to buy and more fees to sell. It could have very well been almost anything that hits those targets and the rules were not set in stone from past malfeasance.
Doesn’t matter if firm made 2%, 0.2%, or 0%……..Has nothing to do with the commission. You could be in a flat fee account where no commission is earned from buy or sell!…… Its about the holding period.
Its easy to understand suitability. Right or wrong IG tends to be more suitable, NR tends to be for aggressive investors.
What’s happened is a decision based on holding periods. If its short term they discourage the trade. Our commentary is irrelevant lol The man has spoken…..it is what it is!!
Interestingly Fido loves to borrow my preferred shares paying me for the privilege. This year I will make 5 figures off of them. Go figure.
Very nice. Do you know what percentage of the borrow fee you are getting?
I’d venture a guess these are being borrowed by arbs doing cap structure arbitrage (like the diff in yield between 2 preferreds).
No idea. I do see that the interest rate they pay me swings wildly. Sometimes they pay 8%, sometimes they pay 1%. The fee accumulates daily and you get a monthly report so its pretty easy to follow. As far as I can tell there is no rhyme or reason as to which securities they borrow but they do seem to like regional banks from my account.
Porky – is this via their Paid Lending Program? I’m eligible but hesitant with my brokerage. Already enrolled with my Roth with one blip of action for 1-2 days.
Yes exactly. I started small and opened up my IRA to them, then my Roth, and then my regular brokerage account. The ONLY stocks they have borrowed in the past year have been the preferreds but they have reliably borrowed a few of them every day.
Thanks Porky. I have a number of preferreds in my brokerage and may enroll. Saw the standard income/asset qualification questions, but wonder if there’s a certain threshold of holdings/shares Fido needs before they offer. Can you tell if the action is mostly in your larger holdings, or more “flavor or the day” stuff, or pretty much across the board?
I would say its in more run of the mill holdings – TFC, MS, BAC but they also borrowed some of the ASB shares I had which surprised me. As far as quantities they have borrowed anywhere from 500 to 10,000 shares. Oddly, I have some JPM issuances as well but they have never touched them.
Like I said its hard to predict. Just sign up and see if you get a bite – you can always end it. Curious how you make out!
Porky:
Is there any downside or risk in doing this? It sounds too good to be
true.
:>) Norm
Well Fidelity could go bankrupt I suppose. That’s about all I could dream up but definitely read the fine print on the agreement.
I find it very much a matter of luck. There are many preferreds they don’t touch but a few they “borrow” almost every day.
I think there may be tax considerations in that it may interrupt your holding period for qualified dividends and of course the payments are interest. They say they pay extra to make up for the tax consequences but everyone’s tax situation will be different. And of course, in an IRA the extra they pay is still tax free or deferred (depending on if it is a ROTH) anyway, so that extra is all bonus.
In a good month they pay me about $100. Some months are a lot less though. Just luck of the draw whether you hold what they want. I have had some interest rates in the 20’s. But lots are less than 10%. The thing is, they almost always only hold them a few days so even a high rate doesn’t amount to all that much money.
Porky, Do you know the tax treatment for what they pay you? Do they issue a 1099 for these? Considered interest or dividends, or ..?
MFZ – they pay you simple interest so this is how I am sure how it would show up for tax treatment. The holdings they have borrowed from me are all in either ROTH or my IRA so the tax question has not hit me.
They issue a separate monthly Securities Lending report (giving you daily activity by security) and I suppose a year-end one but this is my first year so not positive about that.
In my case I have way more assets in my taxable but so far they only seem to like the preferred stocks in my deferred or tax free accounts.
Does any of the brokerage houses allow trades with like KTBA without having to pay extra fees?
FasterPussycat,
By extra fees, if you mean commissions, I don’t know of any
discount brokers that will let you trade these other than the few at Fidelity.
If you open an account directly with a clearing firm like Wedbush they may allow access, but they would want you to be producing 1000’s in commish per month.
I have not gotten around to checking with clearing firms. The few old traps I shot were dead ends.
I have had my brokerage and 2 IRA accounts with Fidelity for over 20 years, but it has become a nightmare trying to sell many preferred stocks due to ridiculous limits. Thinking about moving to Schwab but not sure if they or all the brokers are now in the same boat.
Any thoughts about how to handle this problem would be appreciated.
Most other brokers don’t do it yet but they will if pressured enough. Which ends up hurting the investors they claim to protect. The good news is prices on low volume issues may fall so you can get a bargain if you don’t mind making numerous small purchases and not in a hurry to dump them.
I’m guessing that these “supervisory lapses” were involving new issues or “synicate trades” that were done thru a retail broker. Some people have a good relationship with their advisor and are given priority on buying these new issues, often buying at a discount to par and then flipping right away. The underwriters frown on this as the companies would prefer that their issues be bought by longer term holders and not dumped back into the market on day one. In any event, it doesn’t make sense that Fidelity or others should have an issue with secondary market trades in self directed accounts but I guess they can do whatever they want.
One of the things these brokers could have been doing is marking up syndicate preferred with a commission. That’s a def no-no but I see it done all the time with muni issues…broker sells the security above the public offering price on the trade date.
With munis there’s generally a retail priority period. Yeah, you get preference over institutions. There are several large fines in the past few years here hedge funds/ institutional paid a retail customer with the agreement the customer would flip the trade to them for a small fee.
Hint: If any large hedge funds would like me to bid for them……