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NEW YORK -(Dow Jones)- The brokerage industry's major self-regulator is trying to get into investors' workplaces before scam artists do.
In several recent high-profile cases, groups of employees were persuaded by financial advisors to dump their workplace-sponsored plans in favor of handing their assets to the FAs - with disastrous results. Now the Financial Industry Regulatory Authority is reaching out to human resources departments and unions.
The goal is to give them tools to evaluate financial professionals who may want to "help" the company's employees invest their retirement savings. FINRA will even review marketing materials being shown to employees.
Retirement plans have "a large aggregation of assets. It's logical that people would target this area," said Elisse Walter, senior executive vice president of regulatory policy and programs at FINRA.
"HR departments aren't necessarily experts in these types of issues," she said. "They will welcome help from people who are or appear to be well-qualified investment professionals. Many of these could be quite good. (But) we have found some very problematic ones."
In a June survey by FINRA, 42% of 1,334 investors said they had received advice or information recommending that they roll over their pension, 401k or other employer-sponsored retirement plan and invest the proceeds.
Of those that said they had received such advice, 27% said they received it at "an investment seminar or group meeting I learned about through my employer."
In the past year, FINRA fined two firms $5.5 million and ordered them to pay $26 million in restitution to employees of Bell South and Exxon Mobil Corp. (XOM) who were stung by early-retirement investment schemes.
Employers have a fiduciary responsibility when it comes to giving employees access to investment advice about their employer-sponsored retirement plans, and therefore must be prudent about whom they bring in to provide that advice.
But if a financial advisor hasn't been hired or endorsed by the employer, the employer doesn't have an obligation to vet that person. Just because a financial advisor holds a session at a workplace, it doesn't necessarily imply the employer recommended or endorsed that financial advisor's services.
Employers may take different tacks. While a small but growing number of companies, like International Business Machines Corp. (IBM), provide employees access to free, comprehensive financial advice about college savings, debt management and retirement savings outside the company plan, other organizations don't endorse any financial service provider.
The same goes with unions: The AFL-CIO, for example, doesn't allow its chartered state and local bodies to use union halls for seminars by financial advisors, said Damon Silvers, associate general counsel at the AFL-CIO. But local unions and other AFL-CIO members may allow it, he said.
Either way, Silvers said, it is common for financial advisors to try to reach groups of potential clients through their workplaces or their unions.
"The cost of acquiring new workers is very high, so people in the financial services business are constantly looking for ways to reduce that cost, to cheaply get access to new customers," Silvers said. "There's enormous pressure being exerted on employers and workers to exit employer-provided retirement plans… that provide workers with both income security and relatively cheap money management."
Although seminars are often pitched as educational - and some may truly be - FINRA and other securities-industry regulators have found they can often turn into high-pressure sales sessions, with financial advisors trying to sell products, gain new customers, or both.
In a regulatory sweep of 110 firms between April 2006 and June 2007, FINRA, the Securities and Exchange Commission and the North American Association of Securities Administrators found that despite advertising seminars as educational or workshops, "the primary goal of the sponsors of these 'free lunch' seminars is to obtain new customers and sell investment products."
More than half used advertising and sales materials that included potentially misleading, exaggerated or unwarranted claims.
By reaching out to unions and human resources departments, FINRA wants to help screen the financial advisors who want to give seminars that reach large groups of employees. At no cost, human resources departments and unions will be able to have FINRA review advertising and other material that may be used at such seminars to determine whether the claims are unfounded.
"We bring a lack of bias… and a department used to reviewing communications with the public," Walter said. "We think we can help them do their job."
(Jaime Levy Pessin covers compliance and regulatory issues affecting financial advisors.)
