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Red Flags To Suspect Stockbroker Abuse
f I only had known", one investor told me recently, as we were reviewing her brokerage account losses to conclude that she had been wronged. She, like most investors, suspected something wasn't quite right, but hadn't known where to find help. Indeed, most investors want to like, and to trust, their stockbroker. Stockbrokers know this, and the unscrupulous ones manage to blame everything else - the stock market, the economy, the Far East, Alan Greenspan, you name it - to divert attention away from themselves and their wrongdoing.
Despite the fact that the majority of stockbrokers are honest and work in the investors' best interests, too many do not do so. Let's examine how investors can protect themselves by paying attention to the "Red Flags" of possible stockbroker abuse.
First, pay careful attention to the account opening documents. Know that they call for more than just your name, address and social security number. In fact, the "new account form" is a critical document in securities arbitration. It is the blueprint for how the account is to be handled in view of your investment objectives. Most new account forms ask you to state your net worth and liquid net worth (to determine whether you can bear certain risk of loss, for example), as well as whether you are investing for growth, or for income, or for speculation. Sometimes the forms ask you to describe your risk tolerance, such as conservative, moderate or speculative. Accordingly, if your broker does not discuss these matters with you in opening your account, watch out! And in all events, request and maintain a copy of the completed new account form.
The second Red Flag relates to purchasing and selling securities. Are you consulted in advance of a decision to buy or sell securities? Accept nothing less! Too often, brokers contact clients (if at all) after the trade. Be concerned if the broker claims that the market was moving too fast - he had to get you "in", otherwise the opportunity of a lifetime would be lost forever. Insist on advance notice and approval for all purchases and sales. If not accomplished, complain in writing to the broker and his branch manager. Maintain a copy of that letter for your records.
Inaccurate confirmations (the half sheets that you receive in the mail after a trade has been placed) are the third Red Flag. You should have zero tolerance for brokers who claim that there was a clerical mistake (wrong account, wrong customer). Moreover, note whether the confirmation contains the word "UNSOLICITED". In industry parlance, that means that the purchase or sale was your idea; not the broker's idea. Even if you ultimately say "yes" to a broker recommendation, that should not be marked unsolicited. If you see this error, complain immediately and in writing to the broker and the branch manager.
The fourth Red Flag are margin call notices. These require you to send more money to complete the transaction. Be careful! Margin trading is speculative (you risk more than the initial amount invested). Don't be fooled into the "easy money", "cheap loan" or "benefit of leverage" claims that brokers make. Unless you know, and can bear, the significant risks, set up your account as a "Cash Account". The fifth Red Flag is the "Comfort Letter" or the "Happy Letter". These letters ostensibly thank you for doing business with the brokerage firm. However, in reality, they give comfort or happiness to the brokerage firm, when you fail to respond to them. If you receive such a letter, run, don't walk, to your nearest securities attorney! Your account has been identified as having experienced substantial "activity", for example in the number of transactions or the commissions generated. You also may receive a telephone call from the branch manager (sometimes preceded by a call from your broker, claiming falsely that routine audits are being conducted).
Far too often, investors casually and/or globally approve of what the broker has done for them in the account. Understand that a written memorandum of your conversation with the branch manager will be prepared and placed in your file for later defense. Accordingly, be candid! Ask why have you been singled out for special treatment. Tell the caller your investment objectives and ask if the account activity is consistent with those objectives. Don't casually or globally approve the account activity. In all cases, follow up with a letter to the caller summarizing what you said and what he said during the telephone conversation.
The final Red Flag is poor communication and service. Unable to reach the broker whenever you call? Your telephone calls are not returned? Monthly statements or confirmations do not make sense? New brokers continually are assigned to your account? These circumstances often signal trouble ahead. If the problem(s) persist, visit another brokerage firm, and request that that firm transfer your entire account immediately.
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Sponsored by James J. Eccleston. This Web site contains material of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment adviser when building and protecting your wealth.
All content Copyright © 2010 Advocate Compliance Partners, Inc. except where noted. All rights reserved.
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Telephone 312-332-0000 | Fax 312-332-0003
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