By Brian N. Smiley
If you are going to make money in today’s unpredictable market and don’t have the time or the skill to make your own investment choices, you may have to select a professional advisor to help you. But that is easier said than done.
As a group, stockbrokers are no more or less honest and competent than any other professionals. Many brokers invest their client’s funds with prudence and skill and put the client’s interest first. When an honest broker recommends an unprofitable trade, there’s usually no one at fault. It’s just a risk inherent in the market.
But sometimes the market isn’t to blame, your stockbroker is. In fact, all too often clients lose money due to dishonest behavior on the part of the very brokers to whom they have entrusted their financial well being.
After more than a decade of helping clients recover the financial losses suffered at the hands of unscrupulous stockbrokers, Smiley Bishop & Porter LLP has compiled its list of the ten best things an investor can do to reduce the likelihood of becoming a victim of stockbroker fraud.
1. Investigate your stockbroker before you open an account.
If possible, select a broker on the basis of a referral from a trusted friend who has had good results over the long haul with the broker. Don’t do business on the basis of a “cold call” from a broker you’ve never met. Brokers who obtain new clients through “cold calling” (or “dialing for dollars” as it’s known in the securities industry) are frequently rookies who may lack the experience to guide you through a volatile market. Visit the broker at his office to check on him and his firm. Ask about his or her education, years in the business and investment philosophy, especially in down markets. Be wary of any broker who isn’t willing to take the time to get to know you in person and answer your questions without resort to glib salesmanship. Once the stockbroker has passed your personal muster, press on and do a background check. Call the Financial Industry Regulatory Authority (FINRA) at (301) 590-6500 or check its website at www.finra.org to find out if your stockbroker has any reported customer complaints, disciplinary actions or criminal convictions.
2. Make certain that you make your investment objective entirely clear to your broker.
If your primary objective is, for example, preservation of capital or income let your broker know. If you are willing to speculate with some portion of your portfolio, specify what percentage or dollar amount you are willing to risk. Once you have reached this understanding, write a letter of confirmation to the stockbroker, with a copy to the branch office manager and provide as much detail as you deem necessary. This way your stockbroker and his firm will have a clear record of how you want your account handled. (As with any correspondence you send to your brokerage, keep a copy.)
3. Be careful when filling out papers given to you by the brokerage.
Read everything. Never sign any document that has inaccurate information regarding you, such as income, net worth, experience in the market or investment objectives. And never sign anything you don’t understand or which is not filled out completely.
4. After you’ve opened your account, promptly read all mail you receive from the brokerage firm.
Of particular interest are confirmation slips and monthly account statements; review them with extra care. If you notice something you don’t understand, call your stockbroker immediately. If you don’t like his response or it’s inconsistent with what’s in writing, call the branch office manager. Follow up with a confirming letter.
5. Take an active role in your account.
If your stockbroker asks you to allow him to buy and sell stocks without discussing them with you first, don’t do it. Giving a broker discretion to trade your account is about as dangerous as letting him write checks on your bank account, use your charge cards and handing him the keys to your car and home. If you ever notice a trade in your account that you did not authorize, do not accept an explanation such as “it’s a computer error” from your stockbroker. Instead, immediately write a certified letter to the branch manager, denying that you authorized the trade. There is simply no excuse for unauthorized trading. It violates state and federal law and is basically a form of theft.
6. Remember: Your stockbroker’s compensation may sway him towards investments which do more for him than for you.
Some brokers earn commissions from the buying and selling of securities in your account. Whether your account is showing a profit or loss has no bearing on the amount of commissions he earns. Some stockbrokers buy and sell stocks in your account too frequently in order to generate commissions for themselves. This is called “churning”, and it’s illegal. Even mutual funds, which are products designed to be held for the long term, can be churned by switching from one such investment to another, each time racking up what may be unnecessary commissions. In fact, there is no reason to believe that funds which have sales charges perform any better than no-load funds.
7. Ask what the commission, sales charge, or “load” is on every product your stockbroker recommends.
Some products have higher commissions than others. High commission does not equate with high quality. In fact, the higher the commission for the product, the greater the return the investment must make just to let you break even. The commissions on various annuities and equity-indexed annuities are often obscenely high.
8. Recommending that you trade on margin is another way your stockbroker can generate higher commissions for himself while, at the same, exposing you to greater risk.
When you trade on margin, you are borrowing money from the brokerage firm in order to buy more securities, thus generating more commissions for the stockbroker. The collateral for the loan from the brokerage is the securities you hold in your account. If the price of those stocks goes down, you may get a margin call, which requires you to either sell stocks (often into a falling market) or put more cash into your account. The big losers in the crashes of 1929 and 1987 were margin traders. If you buy stocks on margin and they decrease in price, you can lose your entire portfolio and wind up owing money to the brokerage firm.
9. When investing your money, a good axiom to remember is: “If it sounds too good to be true, it probably isn’t true.”
No matter what your stockbroker says, higher returns always correspond to higher risks. Options, commodities, hedge funds, and limited partnerships are, in varying degrees, speculative investments. If you don’t understand an investment, avoid it. And don’t believe a stockbroker who urges you to buy a stock because he has secret information that some event (such as a merger, new patent, etc.) is about to happen which will increase the price of the stock. Any broker who gives you such information is either engaged in illegal inside trading, or, more likely, a liar. Neither alternative should offer you much comfort.
10. If you have been the victim of stockbroker abuse, don’t assume you have no rights or be too embarrassed to pursue your rights.
Claims against stockbrokers and their firms are usually heard before arbitrators appointed by the NASD. Abused clients have successfully won back their losses, and sometimes have recovered interest, attorney’s fees and punitive damages from their brokers in arbitration cases. But it is important that you act quickly, since there are time limits for bringing claims. If you suspect that you have been victimized, contact experienced securities arbitration counsel at once.
