Columnist Andrew Leckey cites Brian Smiley on a broker’s duties.
Investing is not a game.
That point is brutally driven home during every bear market, when dreams are shattered and investors doubt themselves, their brokers and even the financial system.What’s different this time is that more than half of American households now own stock.
For many average families new to investing, the frustration of difficult economic times has reached a boiling point.
Consider this letter received from a reader distraught over her family’s finances and mistakes made:
“Dear Mr. Leckey: My husband and I have four children and live paycheck to paycheck. Two and a half years ago, my husband took the $34,747 we’d invested in an annuity for our oldest child and put the money in the stock market. He is a schoolteacher who works two jobs and I don’t think he really realized the risk. He doesn’t understand where our money is being invested and I’m definitely clueless. Our last statement now shows we have only $18,166 left!”
She added that her youngest child requires special care, an older child is unable to attend the more expensive college he wished, and both she and her husband worry about retirement. Since she doesn’t believe their broker handled them properly as novice investors, she wondered if National Association of Securities Dealers arbitration could help get back some money.
If she does file a claim, it will be among a blizzard of them being filed this year. Claims and damage awards are rising at the NASD Dispute Resolution group, the primary avenue for investors who feel they’ve been wronged to seek redress.
In 2002, investors filed a record 7,704 arbitration requests asking damages from brokers, the second consecutive all-time high. Damage awards reached $139 million last year, up from $97 million in 2001.
“Main complaints are unsuitable recommended investments, misrepresentation of risk and brokers recommending classes of shares that gave them a bigger commission,” explained Linda Fienberg, president of the NASD Dispute Resolution group in Washington, D.C. “In addition, we already have filed with us a number of claims relating to the advice given by research analysts.”
About 60 percent of claims are settled with the brokerage firm before entering the arbitration procedure, Fienberg noted.
Of claims that actually went through arbitration last year, 55 percent received financial awards.
Cases under $25,000 usually don’t require an attorney, but hiring one is a good idea for larger cases because brokerage firms do have legal counsel. Most lawyers handling such cases for investors work on contingency, paid only if damages are won. A typical charge is one-third of damages received.
The starting point for a claim is the NASD Dispute Resolution Web site, www.nasdadr.com, which includes requirements and forms.
Exhaust obvious avenues with the brokerage firm before you file a claim.
“Go first to the broker, then the branch manager and, if that fails, the compliance department of the firm,” counseled Fienberg, who says it’s vital to keep copies of all written correspondence. “Contacting us would be the next step, since 95 percent of people with brokerage accounts signed agreements that have a dispute arbitration clause.”
An attorney handling a claim examines the account opening documents that state an investor’s previous investment history, income level, net worth, risk tolerance and objectives. “If the investor said in his opening document his objective was speculation, there won’t be a strong case against a broker who put him in high-risk stocks,” said Harry Miller, securities attorney with Perkins, Smith & Cohen LLP and founder of the Securities Fraud and Investor Protection Resource Center in Boston. “But if the investment objective was retirement security and preservation of capital and he was put in high-risk stocks, it’s a strong case.”
Attorneys study an investor’s history through tax returns and account documents. An investor whose past included options trading won’t be as strong a witness as one who previously only owned mutual funds.
“A broker has a duty to be honest with a client in recommending securities transactions, give a balanced presentation that includes risk and not recommend any transaction unsuitable in light of the client’s age, sophistication and needs,” explained Brian Smiley, partner with Page Gard Smiley & Bishop LLP in Atlanta.
The Public Investors Arbitration Bar Association at www.piaba.org lists attorneys involved in the field, Smiley noted.
By Andrew Leckey