Firm Rates Integrity of Investment Companies

Investors spooked by the recent spate of scandals in the securities industry have a new tool for evaluating their brokerage firms.

Weiss Ratings Inc., a Florida-based corporate rating firm, has come up with an “integrity rating” for investment companies.

The rating, compiled by tabulating data on arbitration awards, lawsuits and regulatory actions against securities firms, is designed to help investors avoid those that attract the most attention from regulators and complaints from customers.

Some securities firms say the rating system is flawed, but Weiss contends it provides useful information.

“Until now, no one had a statistical way of measuring integrity. It was just such a hard issue to get a handle on,” said Martin D. Weiss, chairman of Weiss Ratings and author of “The Ultimate Safe Money Guide.” “With these numbers, we feel we have an apples-to-apples way of comparing one firm to another.”

Weiss took data from 1997 to 2001 and created a ratio that reflects the number of lawsuits and regulatory actions per million customers for the 18 biggest investment firms in the U.S. These firms account for about 80% of the nation’s brokerage business.

By using a ratio rather than a raw number, Weiss hopes to account for the fact that, although big brokerages tend to attract more complaints than small ones, that’s often a matter of size, not ethics.

Three-Part Analysis

This is part of a three-pronged approach that Weiss is using to rate brokerage firms. The company has published a report on brokerage firms that maintained positive investment ratings on companies that were careening into Bankruptcy Court. And it soon will report on how integrity--at least as measured by Weiss--affects an investment company’s financial stability.

Weiss found that the vast majority of brokerage firms it evaluated--47 of 50--clung to “buy” ratings on companies that were so financially troubled that they filed for bankruptcy protection, wiping out equity investors.

There also is a connection between a firm’s integrity and its financial stability, Weiss said.

An early reading of the data that will be contained in his third report suggests that most brokerage failures are linked to high numbers of legal actions and arbitration claims.

The firms that scored lowest in Weiss’ integrity ratings--Prudential Securities Inc., Ameritrade and U.S. Bancorp Piper Jaffray--are critical of Weiss’ methodology.

They say Weiss totaled all complaints, regardless of whether the complaint eventually was settled in the customer’s favor or the brokerage firm’s favor. Moreover, some of the complaints were related to institutional business or employee complaints--issues that generally don’t concern individual brokerage clients.

Prudential said a few of the complaints on its record really were filed against another brokerage firm, which simply cleared its business through Prudential.

“The Weiss rating has been troubling to us from the beginning because it seems to look at raw numbers,” a Prudential spokesman said. “We believe you need to look beyond the numbers and see how many of the complaints were settled in the broker’s favor. The fact that a complaint was filed doesn’t necessarily make it valid.”

However, the rating firm countered that all brokerages were subject to the same rules so the overall ranking shouldn’t be affected by it.

Moreover, although some complaints were settled in the brokerage firms’ favor, any consumer willing to go all the way through arbitration or the legal system is clearly dissatisfied, Weiss President David Lackey said.

“Everybody has an excuse about why this doesn’t apply to them,” Lackey added. “But the ratings are consistent.”

What firms had the highest and lowest integrity ratings, according to the Weiss study?

Prudential Securities ranked the worst, with 72.3 complaints per million customer accounts. Online brokerage Ameritrade was ranked second worst with 67.1 complaints per million. U.S. Bancorp Piper Jaffray Inc. closely followed with 64.5 complaints per million.

There’s a big gap between these firms and the next most-complained-about firms. And a few firms had a nearly spotless record. Fidelity Brokerage Services had 3.7 complaints per million customers; Credit Suisse First Boston Corp. had 5.0 complaints per million and Edward D. Jones & Co. had 8.1 complaints per million.

“I can’t speak to the methodology, but our feeling is that if we had eight complaints per million, that’s still eight too many,” said Alan F. Skrainka, chief market strategist at Edward Jones. “We try very hard to make sure that our customers understand what they’re buying and don’t make more risks than they can handle.”

The bottom line: The chances of having a problem with one of the worst-ranked firms is about 8 to 10 times greater than with one of the best-ranked firms, Weiss said.

Multiple Sources Needed

Securities experts caution that consumers should use several sources of information when choosing a broker. For instance, Merrill Lynch & Co., which scored relatively well in the Weiss rankings, is at the center of the current storm over conflicts of interest involving stock analysts.

The Weiss ratings also can’t replace referrals from friends and family and checks on the history of the individual broker who has been assigned to your account, said Margaret Draper, a spokeswoman for the Securities Industry Assn.

Consumers who are considering switching brokerage firms should check the National Assn. of Securities Dealer’s Web site at www .nasdr.com. The site includes the complaint history of each registered representative and also has information on financial advisors who don’t sell securities. Similar information is available on the NASD’s disclosure hotline at (800) 289-9999.

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Counting Complaints

Weiss Ratings has developed an “integrity rating” for brokerage firms that ranks the 18 biggest U.S. brokerages (as measured by retail accounts) by how many complaints they have received per 1 million accounts.

Total Cases per

Firm cases* million accounts

Prudential Securities 158 72.3

Ameritrade 91 67.1

U.S. Bancorp Piper Jaffray 47 64.5

E-Trade Securities 118 36.9

Raymond James 36 36.1

First Union Securities 88 35.2

UBS 87 34.8

A.G. Edwards 103 31.2

Salomon Smith Barney 204 30.7

Morgan Stanley 151 28.0

Quick & Reilly 34 18.9

Charles Schwab 124 16.5

Merrill Lynch 168 16.1

TD Waterhouse 68 15.3

American Express 19 9.5

Edward D. Jones 38 8.1

Credit Suisse First Boston 20 5.0

Fidelity Brokerage Services 43 3.7

* Regulatory and legal actions and arbitration cases filed from 1997 to 2001.

Source: Weiss Ratings Inc.

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Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For past Personal Finance columns visit The Times’ Web site at www.latimes.com/perfin.