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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12/21/2024
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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.
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?
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……