Professor Lazaro was quoted in the MarketWatch article, “How to find out what your broker is charging you.”
The article examines the model fee disclosure for brokerage firms developed by the North American Securities Administrators Association (NASAA). Professor Lazaro commented on the usefulness of the model disclosure:
“The model fee disclosure is certainly helpful for investors by providing consistency in how account related fees are disclosed, and by informing investors of the types of fees they may be charged,” says Christine Lazaro, an associate professor of clinical legal education at St. John’s University School of Law and director of the Securities Arbitration Clinic.
Professor Lazaro also commented on the shortcomings of the disclosure:
“Account-related service charges are a small portion of the overall fees an investor may pay when investing,” she says. “The majority of the fees paid are a result of commissions, mark-up and mark-downs, advisory fees and investment related expenses. Other than a disclaimer at the top, that this does not include most of these fees, there is no further information provided about the most substantial fees an investor will pay.”
Lazaro further noted that NASAA’s fee table does not disclose that investments may have significant internal expenses which may never be disclosed by a firm. “For example, when an investor purchases shares in a non-traded REIT, the investor may pay $10 per share,” she says. “The investment is then listed on the person’s account statement as having a value of $10 per share.”
Unfortunately, she says, $1.50 of that may have been diverted to cover the REIT’s initial expenses, meaning it is probably worth no more than $8.50 — at least that is how much is actually being invested by the REIT). “The investor is not made aware of this until the REIT is revalued, perhaps a year or more into the investment,” Lazaro says. “At that point, the investor may see a substantial drop in the value of the investment, which is primarily related to funds being used to cover expenses. With the cases I have seen dealing with non-traded REITs, I have never seen a case where the broker explained how the internal expenses of the investment worked.”
Finally, Professor Lazaro commented on investor expectations:
Many arbitration claims will focus on the fact that the investment sold was inappropriate for the investor or the broker failed to provide relevant information so the investor can make an informed decision, according to Lazaro.
“Investors expect that their brokers are recommending investments that are appropriate for them and often times also that are in their best interest although, of course, there is not always a fiduciary relationship that would require the broker to act in the investor’s best interest,” she says. “Investors are rarely entering conversations with their broker thinking that they have to verify the information they are given by their broker, or even feeling competent to do so.”
Of course, if there is any information an investor does not understand, Lazaro says the investor should ask questions and ensure that the questions have been answered to their satisfaction.
“This does not mean they can avoid arbitration if the broker acted improperly, and to some extent, investors should be permitted to rely on the information they have received from their brokers,” she says.
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