If you hope to prosper in today’s volatile market and lack the time or skill to choose your investments, you should find an honest, competent professional adviser, but that is easier said than done.
Many brokers invest client funds with prudence and skill and put their clients’ interests first, even when inherent market risk brings a bad result. However, clients too often lose money due to dishonest behavior by brokers. After more than a decade of helping clients recover financial losses caused by misconduct, we have compiled a list of suggestions for investors to protect themselves from fraud:
1. Investigate your stock broker.
Do this before you open an account. If possible, select a broker on the basis of a referral. Ask a trusted friend if he or she has had good long-term results with a broker. Don’t take “cold calls” from brokers you do not know. Brokers who “dial for dollars” often cannot guide you through a volatile market. Visit the broker’s office. Ask about education, years in the business and investment philosophy. Be wary of a broker who isn’t willing to get to know you in person and answer your questions. Do a background check. Call the NASD at (800) 289-9999 or check online at www.nasdr.com to find out if your stockbroker has reported customer complaints, disciplinary actions or criminal convictions.
2. Clearly establish your objectives.
If, for example, preservation of capital or income is important to you, let the broker know. If you are willing to speculate with part of your portfolio, specify what percentage or dollar amount you are willing to risk. Write a detailed letter of confirmation to the stockbroker, with a copy to the branch office manager. This way your intentions will be clear. (As with any important correspondence, always keep a copy.)
3. “If it sounds too good to be true it probably isn’t”
No matter what your stockbroker says, higher investment returns always correspond to higher risks. Options, commodities, penny stocks, and limited partnerships generally are speculative investments. If you don’t understand an investment, avoid it. Be suspicious of bogus projections based on “past performance” — particularly when you factor in the historic bull market of the 90’s. Relying on wildly optimistic projections is extraordinarily dangerous for investors approaching or entering retirement.
4. Be careful with paperwork.
Read everything. Never sign a document that has inaccurate information such as your 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.
5. Read your mail.
Review confirmation slips and monthly account statements with extra care. If you notice something you don’t understand, call your stockbroker immediately. If you don’t like the response or if it’s inconsistent with what’s in writing, call the branch office manager. Always follow up with a letter.
6. Monitor your account.
If your stockbroker asks to buy and sell stocks without discussing them with you first, just say no. Giving a broker discretion to trade your account is as risky 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 notice a trade in your account that you did not authorize, do not accept an explanation such as “it’s a computer error.” Immediately write a certified letter to the branch manager, denying that you authorized the trade. Unauthorized trading violates state and federal law and is a form of theft.
7. Remember how brokers are paid.
Your stockbroker is generally paid on a commission basis by buying and selling securities in your account. Profits and losses have no bearing on the amount of commissions he earns. Some stockbrokers buy and sell stocks too frequently in order to generate commissions for themselves. This is called “churning,” and it’s illegal. Even mutual funds and variable annuities, which are products designed to be held for the long term, can be churned. Even usage fee accounts where you pay a fixed percentage for managing your account can be abused because not all products are commission free.
8. Ask about loads and other fees.
High commissions do 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. Loads rob you of return. Variable annuities often carry unconscionably high sales charges and early withdrawal penalties. In the mutual fund area, there is no evidence to support the view that load funds outperform no-loads.
9. Avoid margin.
Margin trading generates higher commissions for your stockbroker while 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. 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. Historically, the big losers in the stock market crashes of 1929, 1987 and more recently 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.
10. Don’t assume you can’t fight back.
Put aside your fear or embarrassment. Claims against stockbrokers and their firms are usually heard before arbitrators appointed by the NASD or the NYSE. Abused clients can win 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.