This commentary expresses one of the most difficult areas in all of securities sales and practices. It involves the real or apparent responsibility of a commissionable broker to monitor investments on an ongoing basis and to provide additional input to past and current investors/clients regarding their positions.

Investments, Investors, Representatives not Covered

The issue does not involve fee only planners or advisers who are paid on an ongoing (usually annually) basis to professionally and constantly monitor an investors portfolio.

The commentary does not involve investors who are making their own investment decisions and use a discount broker (assuming there is nothing that at broker making the trades would spot that would be deemed unsuitable even if requested by an investor- such as extensive uncovered option writing).

The commentary does not relate to unsuitable investments or recommendations of any kind by a broker, since, whether the investments were monitored or not, they were unacceptable from the initial sale and no amount of continued review changes their improper character.


The bulk of the brokerage business is conducted by commissions (or a percentage of markup/downs) whereby the broker receives compensation only upon a sale. Inherent in that process is the potential conflict of interest in that the product is only- or primarily- being presented by the broker solely for the compensation. Some investors feel that they are receiving less than objective advice. And considering the free trips and other miscellaneous incentives offered by many firms and funds, part of the cynicism is justified.

But assuming that a broker has conducted a thorough review of a clients needs and suitability and has suggested a proper product under a diversified portfolio, it nonetheless is a fact that the payment of a commission on that product is a onetime event (12b-1 funds and similar compensation excluded). No further responsibility- by code or law- requires that any additional followup on the investment or the investors financial condition be conducted.

But the question arises- and surely must be considered by arbitrators- is if there is any period of time that a reasonable man could logically infer where the broker had some outstanding ethical or professional responsibility to monitor the investment. And is that time period the same for all stocks? Bonds? Funds? Municipal obligations?

As an example, consider Digital Stock. Once very highly rated, it soared to a high of $200 only to subsequently drop to around $33 (12/92). If a broker had sold some of this stock five years ago when the rating was strong, is there any period after that where there lies some type of responsibility (or liability since that is the key problem for arbitrators) where investors would need to be informed of the potential change in rating? Obviously, a substantial value in a portfolio has been lost due to the lack of review by the broker (and certainly by the investor)- where they, at least initially, trusted his advice. If the investor is NOT sophisticated and used this broker because of the supposed recommendations and competency, does all this stop upon payment? Six months later/ Two Years?

What about IBM which had been- and still is- a major part of many portfolios. Some investors within the last few years have seen a significant loss. Is it the broker's or firm's responsibility to inform investors who had purchased only one share of stock? What about 50 shares? 100 shares?

And where does that obligation lie, if any, on very volatile stock or fund? Biotech stocks had done exceedingly well prior to 1992. But they underwent a significant retrenchment after that and suffered some losses. Even though a broker could not have foreseen such a drop, what was their responsibility once the decline commenced?

In that same regards, but perhaps clearer and more immediate in terms of change of value, was the use of international bond funds till late 1992. They had provided returns well over 10% annually- though it happened during one of the lowest U.S. dollars on record. Assuming that a broker had informed investor's of the money exchange problem, was it still his responsibility to inform his clients once the dollar started moving back up and the funds suffered losses? (Yes) Within the same context, was it the responsibility of the broker or firm to monitor the movement of the U.S. dollar in the first place?

The discussion must also consider active versus inactive clients- and even for how long the account has not traded. And also if the client is now deceased, what responsibilities should there be to the beneficiaries.

There are no set rules regarding any of these examples. But the problem exists for literally every firm and for almost every broker who works on a commission. Arbitrators will have to weigh this question in many cases since plaintiffs will imply some industry standard or ethical code suggesting a level of fiduciary responsibility beyond that of the initial sale (assuming suitable).