Bloomberg (March 29, 2015 7:04 am) - Lawyers who represent wronged investors aren't saying nice things about the opposition.

While ads for Wall Street firms make it sound like investment professionals are just like doctors and lawyers when it comes to protecting clients interests, in private they act more like used car salesmen, according to the Public Investors Arbitration Bar Association.

The group contends Wall Street firms' marketing efforts give the impression that they are bound by a fiduciary duty to put their client's interest first. But when wronged investors claim their representative violated that fiduciary duty, Wall Street contends it has no such obligation.

"A broker is allowed under current rules to put his interests rather than his client's interests first. That disconnect costs people money," said Joseph Peiffer, a New Orleans attorney who is president of the bar group.

Mr. Peiffer and Christine Lazaro, head of the securities arbitration clinic at St. John's University's law school, authored a report citing nine investment firms whose ads claimed to put clients first, but then denied they had any fiduciary duty in non-public arbitration hearings where most investors must go if they want to recover losses. Mr. Peiffer said the report is only a small sample of the two-faced behavior.

"I've seen that in every one of the cases I've handled, and I've represented well over 500 investors," Mr. Peiffer told journalists during a conference call Wednesday.

At issue are the standards that apply to two types of investment professionals. The fiduciary standard applies to registered investment advisers, who are required to put their clients' interests first. Brokers are held to a suitability standard. They must make sure their clients' investments are suitable given their income, net worth, investment objectives, risk tolerance, and what other investments they have. That means brokers can recommend investments that generate more income for themselves -- and less for their clients -- as long as the products are suitable.

Many investors have no idea whether they are dealing with an adviser or a broker and therefore don't know which standard applies to their relationship.

The Dodd-Frank Act, major legislation passed in the wake of the 2008 financial meltdown, required the U.S. Securities and Exchange Commission to study whether brokers should be bound by a fiduciary standard. Five years after the law was enacted, the agency has yet to write regulations. The inaction is costing investors an estimated $17 billion annually, according to Mr. Peiffer and Ms. Lazaro.

That estimate is disputed by the Securities Industry and Financial Markets Association, which said brokers are already held to a de facto fiduciary standard.

"We'd like to see it codified into a legal standard as well," said the association's associate general counsel Kevin Carroll.

Mr. Carroll said the fact that brokers disclaim fiduciary responsibility in arbitration hearings "is simply a reflection" of the fact that they legally are not bound by such a standard. He pointed out that breach of fiduciary obligation is the most common complaint investors make when they seek arbitration.

"Why is it most common? Because it is allowed," Mr. Carroll said.

The Financial Industry Regulatory Authority, the industry group that runs the arbitration program, said investors claimed the violation of the fiduciary standard in 2,106 of the 3,822 complaints filed last year.

Ron Heakins of OakTree Investment Advisors in Shadyside said brokers can be bound by a fiduciary standard when a client never says no to whatever investments are recommended.

"In most cases, brokers are fiduciaries without understanding they really are," said Mr. Heakins, who has acted as an arbitrator as well as an expert witness in arbitration hearings.

Mr. Heakins, who said small investors are not protected enough, supports applying a fiduciary standard to brokers. But he said getting a tough standard approved will be an uphill battle.

"It would really turn the industry on its head," he said. "You would destroy the business model of the broker dealers."

Those who believe the investment industry already is over-regulated like to point out that Ponzi scheme operator Bernard Madoff was bound by a fiduciary standard. That just indicates that whatever the SEC eventually cooks up, investors still have to be careful out there.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.