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Who's Responsible When Clients Take a Flier?

Registered Representative

New Internet trading programs raise liability concerns for reps.

Full service firms warn that clients are accountable for unsolicited trades.

Do it yourself trading blended with full service brokerage has arrived on Wall Street. With it, you face a new question: How much responsibility do you bear in protecting clients from investment pitfalls when they trade online especially now that you’re no longer on the front-end of the transaction?

Merrill Lynch and Prudential Securities have introduced new lower-cost fee accounts that have opened the door for more self-directed trades. Officially, Merrill Lynch and Prudential downplay any suggestion that reps face increased legal exposure from the new programs. Firms forewarn clients that unsolicited trades are their own responsibility, whether conducted online or through an adviser. Indeed, NASD suitability rules apply to investment recommendations, and unsolicited orders are not recommendations.

Unofficially, however, full service firms worry about being held to a higher standard than traditional discounters are when it comes to protecting customers who trade online. Major brokerages are bound by the NYSE “Know Your Customer” rule, which doesn’t differentiate between solicited and unsolicited trades. Furthermore, unlike discounters, full service firms have an advisory-type relationship with the client. In the case of Pru’s Prudential Advisor account and Merrill’s Core Relationship account, the firms receive annual fees.

“The problem is going to be the management fee,” says Morgan Bentley, a Newark, N.J., securities attorney, representing claimants and respondents in arbitration. “The broker’s getting a fee. He has arguably got some responsibility not to let someone commit financial suicide.”