How to Prevent and Resolve Problems with Investment Professionals
Whether you make or lose money in the market depends on how your investments perform. That's what the risk in investing is all about. Investors who lose money strictly because of "ups and downs" in the market do not have grounds for blaming their brokers.
However, if the reason you lose money is fraud or abuse at the hands of an investment professional, you may be able to recover the resulting losses.
RESEARCHING YOUR BROKER CHOICES
The best advice is to avoid getting into a problem situation with your broker or other financial professional in the first place.
The first step is to get the facts about the person and firm that will handle your investments. This is one of the most important ways that your state securities agency can help you.
Contact your state securities agency and ask these questions:
SETTLING ON A STRATEGY THAT MAKES SENSE FOR YOU
One of the biggest mistakes investors make is giving up control of their investments. There are practical steps you can take to stay in charge of the people who manage your money.
Make sure that your risk tolerance and your investment strategy match.
When you begin a relationship with a broker or financial advisor, you should be asked a series of questions. Your financial professional will need specific information about your income and assets, your career and retirement plans, and the level of risk you are willing and able to take in investing. This is your financial profile.
KEEP ACCURATE AND COMPLETE RECORDS
Your financial profile should be accurately reflected on your new account form. Check the form and get a copy for your records.
If your investment strategy changes over the years, be sure that your records accurately portray your revised objectives.
Review and keep all of your investment records. If you ever have a dispute with your broker, you will want to have a complete set of records documenting your side of the story.
Your account statements are an important key to controlling your investments. They should be checked over carefully as soon as you receive them. Since no two account statements look alike, you will need to familiarize yourself with the format, terms and codes used by your brokerage firm.
You'll want to review the account activity section to confirm that it contains only those transactions you have authorized. Check the section of your statement that reflects any charges or fees debited to the account.
If there ever is any information in an account statement that you don't understand or agree with, contact your broker immediately and get a satisfactory clarification of it.
Additionally, if you do business with your broker over the telephone or in person, follow up by putting your spoken instructions in writing. Keep notes on all conversations with your financial professional. Note the date, place and subject of the meeting.
Keep an eye out for what are known as "happy letters." These are letters from the brokerage firm asking if you have any concerns about your account. The letter may even vaguely indicate that certain circumstances led the firm to write to you. Firms send out these letters when they detect unusual (and possibly troublesome) activity in an account. Write the firm and ask them to indicate exactly why they wrote to you.
RECOGNIZING INVESTMENT FRAUD AND ABUSE
Fortunately, the vast majority of investment professionals are never accused of fraud and abuse. But there are brokers and financial advisors who engage in misconduct. Here are the major types of problems that you should be on your guard against:
Unsuitable Investments. Brokers must follow what is called the "know your customer" rule. It requires them to make certain that the investments they recommend to you "match" your financial goals and the amount of risk appropriate for you.
Unauthorized Trading. Your broker is required by law to get your permission prior to trading in your account. Trades carried out without your permission are "unauthorized," unless you give him or her discretion over your account. Unauthorized trading is illegal and should not be tolerated.
Misrepresentations/Omissions of Material Facts. Let's say that your broker tells you that investing in a new issue of stock is as "safe as a CD." This is an example of what regulators refer to as a "misrepresentation." Your broker is obligated to be truthful -- and complete -- in presenting investment opportunities to you.
Churning/Excessive Trading. Most investment professionals earn commissions when they buy and sell investments on behalf of their clients. If your broker trades excessively in your account, you could have a valid claim against that broker for "churning."
Theft of Funds. One of the most devastating situations a small investor can encounter is actual theft by a broker or financial professional.
PART 2: RESOLVING PROBLEMS WITH YOUR FINANCIAL PROFESSIONAL
What if you suspect that there may be a problem with the way your broker has handled your money?
Contact the broker and explain your view of the problem. Spell out what resolution you expect within a specific period of time. If the communication with your broker is in person or over the telephone, follow up in writing. Keep copies of all correspondence for your records.
If the situation has not been corrected in the specified time, contact the broker's branch office manager. Again, put it in writing.
If you do not receive a satisfactory resolution at this stage, contact the compliance division of the brokerage firm.
Send a copy of this letter (and any subsequent letters) to your state securities agency.
Don't wait to act! State laws limit the amount of time you have to take action against a broker. Time could run out, making it impossible for you to take steps to recover your losses.
MAJOR ARBITRATION ALTERNATIVES
ARBITRATION AND YOU
Virtually all brokerage houses now require their customers to agree to arbitration instead of going to court. This requirement is contained in the agreement you sign when opening a new account.
Where do you get started in the arbitration process?
First, consult your account form to identify the arbitration forum designated by the brokerage firm. Then, contact the appropriate forum and request a "demand for arbitration" packet.
The packet will explain how to file an arbitration claim. If you have questions about the information contained in the packet, contact the organization sponsoring the forum.
FILING AN ARBITRATION
Among the documents you'll be asked to complete is a "statement of claim," which sets forth the nature of the dispute, the amount of the claim involved, and the damages that you are seeking.
Your statement of claim should be focused and 100 percent accurate. Exaggerated claims or inaccuracies can destroy your credibility and any chance of recovery. The damages you seek should be reasonable and based on the actual losses attributable to the broker misconduct.
SHOULD YOU GET REPRESENTATION?
Investors are not required to be represented by legal counsel in arbitration. However, those who are unfamiliar with securities laws and the process of arbitration often choose to hire an attorney to represent them.
If you intend to seek legal representation, it is important that you find an attorney familiar with securities law and how investor arbitration works. Be sure to do your homework by thoroughly checking out attorneys who are unknown to you. Determine the potential cost of legal help and the fee options available to you.
FINDING A LAWYER
Your state or local bar association may be able to assist you in finding a qualified lawyer. One national organization, the Public Investors Arbitration Bar Association (PIABA), can identify lawyers in your state with the appropriate background. For more information about PIABA member lawyers, call 1-800-899-9906.
INSIDE THE ARBITRATION PROCESS
When you agree to the arbitration process, you agree to accept the outcome of the arbitration. For this reason, it's important that you fully understand how the arbitration process works.
The methods of selecting arbitrators vary among organizations, but most investor arbitration panels consist of three members: a chairperson, one panelist from outside the securities industry and one from within the industry.
Prior to your hearing, you will be given an opportunity to object to potential arbitrators if there is a legitimate reason for doing so.
Once you have filed the necessary documents and fees, you (the claimant) will be notified of any requests by the respondent (the broker/brokerage firm) for additional information. It's important that you respond in a timely manner to these requests.
You will be informed of the proposed date, place and time of the hearing. Arbitration hearings are not conducted in courtrooms, but in conference rooms or hotel meeting facilities.
The hearing, while more informal than a courtroom proceeding, will follow guidelines for the presentation of evidence and testimony, rebuttal, opening statements and closing arguments. The arbitrators will make a decision based on the testimony and supporting evidence you and the respondent submit.
At the end of the hearing, all parties to the claim will be excused while the arbitrators discuss their findings. You will be notified by mail of the decision of the arbitration panel, normally within 30 days. The decision will not give a reason; it will merely state whether or not your claim has resulted in an award of damages.
If the decision is in your favor, the notice you receive will specify the amount awarded and the terms of payment. The respondent will be required to pay your claim within a specific period of time, in most cases within 30 days of the award. Awards not paid within the specified time frame will bear interest charges.
PART 3: GUIDE TO INVESTMENT REGULATORY AGENCIES
NATIONAL REGULATORS
Copyright, Investor Protection Trust, 1995