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Investor Protection

Risky Business: Borrowing from Customers

December 19, 2019

by Howard Haykin



Neither a borrower nor a lender be;
For loan oft loses both itself and friend.
                - Quote by Polonius in Hamlet, a Play by Wm. Shakespeare



William Shakespeare wasn’t the first person to question the wisdom of loaning money. Nor has he been the last. The Financial Industry Regulatory Authority, or FINRA, reminds us every month that brokers regularly borrow from customers – even though they do so in violation of their own firm policies and industry regulations.


Loans to friends, and customer loans to brokers, are fraught with risk. The trust agreement between the lender and the borrower is often violated - by a late repayment or by no repayment at all. These dynamics have everything to do with human nature, and little to do with the securities industry.


- -  If someone isn't financially responsible with their own money, you have no business lending them yours. People who don't know how to handle their own money will never respect and value yours or understand how hard you've worked or the sacrifices you've made to earn it.  [Yvonne Kariba ,]


- -  Some people seem to think that they need your money more than you do and won't hesitate or feel bad about inconveniencing you so that they can conveniently meet their needs. [Yvonne Kariba,]


- -  The basic problem … is that, as the lenders and borrowers looked back on the initial agreement, they saw it very differently. In many cases the borrowers thought the lenders didn't expect to be repaid because it was an agreement among peers, a little help from a friend.  [Lee Dye,]


- -  You’re living beyond your means if (among other things) … you’re not saving at least 5% of your total income, you have no emergency fund, you don’t pay off your credit card balance in full every month, you count your chickens before they hatch.  []



WHY BROKERS BORROW FROM CUSTOMERS.    Brokers who may be financially strapped or in need of a “tide me over” loan frequently turn to customers for loans. Why? They’re distinctly aware of their customers’ financial conditions, spending needs and levels of financial sophistication. Many customers often have significant pools of readily available money. And the personal aspect of their relationships make customers - particularly senior individuals - relatively easy marks.


Yet, the fact that many brokers fail to repay customer loans bears out the above common observations about money-lending. Take for example, this Merrill Lynch broker who, after borrowing $69,000 from 2 customers, filed for bankruptcy and failed to repay the customers. After each complained to the firm, Merrill Lynch repaid the loans and fired the broker.  [FINRA Case #2018058520801]  Or the Ameriprise broker who borrowed $150,000 from a customer to invest in an private e-cigarette company. Though he promised to repay the principal within one year, with 10% interest, and to share 10% of any profits earned on his initial investment, the broker never repaid the customer.  [FINRA Case #2017055910301]



Going forward, if you lend money to a broker, don’t be surprised if you’re never repaid and if you eventually must search for a new broker.