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how to avoid problems

Be careful in choosing a stockbroker or investment advisor

The choice of an investment advisor or stockbroker and brokerage firm should be carefully considered. You should not agree to work with a broker simply because the person has called you by telephone to solicit your account. "Cold calls" from brokers are an extremely common method for brokers to obtain new customers. But you should not agree to start trading with just any broker who calls you out of the blue. You should know who you are dealing with and make inquiries prior to putting your financial affairs in a stranger's hands.

You should interview a number of prospective brokers or investment advisors and listen carefully to what they say. Ask friends, relatives and business associates for recommendations of brokers or brokerage firms and interview all of them carefully noting the differences. Notice how sensitive they seem to your particular needs and questions. Make sure that you understand their investment philosophy and how they charge for their services.

You should check the prospective brokers background carefully. Find out how long they have been in the securities industry, and how long with that particular firm. Does the broker have a stable employment history? Has the broker worked for reputable firms previously? How often has he changed firms? Why did he leave the former firm? Is the broker now working for a well-known, reputable brokerage firm?

You should not hesitate to ask the prospective broker whether he has been named in any customer complaints, arbitrations or regulatory investigations or disciplinary actions. Ask for details of any such matters which the broker acknowledges. If the broker admits to having received some customer complaints, you should not be surprised as most brokers who have been in the business long enough have been subject to a customer complaint at some point. It may be a reflection of their honesty if they admit it and describe the circumstances.

You should then check the prospective broker's background through your state's securities regulation division. You can obtain important information from the securities division. From the public records you can learn how long the broker has been a registered stockbroker, how long and for what brokerage firms he has worked, his employment and educational background and, perhaps most importantly, the number and nature of complaints against him, the outcome of the complaints or legal actions and any regulatory or disciplinary actions on his record.

Since this information is available to the public for the protection of the public, you should certainly take advantage of it and reject any prospective broker whose record indicates a track record of customer problems. The broker's CRD (central registration depository) record including the above information may be obtained from FINRA or the state securities division. You may reach FINRA at (212)858-4200, and the state securities division may be located through the North American Securities Administrators Association at (202)737-0900.

You should meet with the prospective broker in person, in his office, so that you can get a sense of what they are like face-to-face and see the appearance of their office environment. Finally, you should ask the prospective broker for at least a few customers as references for you to contact.

Exercise caution in opening account and with new account documents

You should make sure to read carefully all documents which you are given when you open your account and especially all documents which you may be requested to sign in connection with opening your account. Never assume that the fine print is just for the lawyers. That fine print may come back to haunt you and you will be held responsible for what you have signed. You should be especially careful if you are told that something is a "mere formality" and you do not have to read it before signing. If your broker says that, he may mean no harm but you will be held responsible for what you have signed as if you have read it, understood it and agreed to it at the time.

Account opening documents may be critical for determining what type of investments are appropriate for your account. You should make sure that you or your broker carefully and accurately record your investment objectives, your financial situation, your prior investment experience and your risk tolerance. You should be absolutely honest with your broker in describing your financial situation, securities trading experience, investment objectives and risk tolerance. This is critical information that must be conveyed accurately and clearly for your account information. Make sure that you get a copy of this, check it for accuracy and keep a copy for your records.

If you are asked to sign any documents or if you are given any documents relating to your account which you do not understand completely, make sure that you ask questions. You should not be satisfied if you do not understand the contents of the documents. You should assume that anything that you do not understand may be important and do not be put off by comments such as "it is a mere formality."

Review all account statements, trade confirmations, prospectuses and correspondence from the broker or brokerage firm

You should make sure that you promptly open and review everything that is sent to you from the brokerage firm relating to your account. Trade confirmations typically carry the inscription that any objections to the trade must be made within a certain number of days from receipt of the confirmation. Make sure that you look at the confirmation, that it is consistent with your discussions with the broker regarding the trade, and be sure that you understand the transaction.

If you have any questions about a trade confirmation, you should not hesitate to call the broker, and if you have problems with the trade you should make sure that you respond in writing promptly and keep a copy of your letter. You will have a difficult time being taken seriously if you complain about unauthorized trades for the first time years after the fact and admit that you generally did not bother to open the envelopes or carefully review the trade confirmations which you received in the mail at the time.

A prospectus for an investment is a very important document which should be read prior to making the investments. These documents include critical information regarding the nature of the investment, risk factors and who it is appropriate for as an investment. You will often find the risk factors in large bold letters, but sometimes that information will be buried in the middle of dozens of pages of incomprehensible, legal, technical jargon. Make sure you find it and read it carefully. If there are sections of the prospectus which you do not understand, ask questions until you do understand it. In the future you may be held responsible for what is in that material.

Of course, you should also carefully review the monthly account statements which you receive from the brokerage firm. You should check the trading activity reported in the account in order to make sure that it matches what you have been told by your broker and what you have authorized during the prior month. You should also compare the beginning and ending net equity figure for the account and compare it with prior months so that you have a good idea how the account is performing overall.

You should be comfortable with your account statements. You should not be bashful about asking your broker to explain how the account statements work if you do not understand the basic format of the statements. If your broker cannot explain the statements to you or if you still do not understand the statements after his explanation, this is a sign of trouble. You should not have an account with a firm where you cannot understand the account statements.

If you have questions or problems with the information on the monthly account statements you should promptly express your concerns to the broker. You may also request a meeting with the broker's supervisor or branch office manager if your complaint about the activity reported on the monthly statement is not adequately answered by the broker.

Finally, you should review the correspondence you receive from the broker or brokerage firm and do not ignore anything which sounds at all strange or unusual. Many brokerage firms will send letters to customers inviting them to contact the branch office manager if they have any problems. You should take this invitation seriously, because if you do have problems and you have ignored this letter, it may later be used against you by the firm.

You should not take lightly any letter from a brokerage firm which requests that you sign a copy of the letter and return it to the firm. Brokerage firms at times send such letters requesting the letter be signed and returned in order to confirm that the trading in the account has been satisfactory to you, is in accordance with your investment objectives and that the broker has explained all the risks of the investments. Brokers may sometimes refer to these letters as mere formalities for the file, but you should carefully consider such letters and be certain that you respond honestly. If there have been problems, you should indicate it on the letter, mail it back and keep a copy for your records. These "comfort letters" should never be ignored.

Listen carefully to what the broker says and ask questions

If your broker is making strange statements you should listen very carefully. If what he promises sounds too good to believe, you probably should not believe it. Use common sense in considering what the broker is saying.

You should not be embarrassed to ask your broker questions in order to satisfy yourself about what he is saying. Make sure that you understand what he says, and if you cannot understand it, do not do it.

You should question whether a recommended investment or investment strategy is consistent with your investment objectives and risk tolerance. If something sounds risky and you want a safe, conservative portfolio, then you probably should not be considering that investment and you should ask your broker why he is even mentioning it to you. Make sure that he understands your investment objective. If you hear from your broker that a recommended investment can triple in value overnight, you should assume that the opposite may also occur, and do not speculate unless you fully understand what you are getting into.

Many brokers will tout a particular investment as a "sure thing, guaranteed." You should always ask if it is really guaranteed and guaranteed by whom. Ask the broker to explain the risks thoroughly. Make sure that you understand the risk, that you are willing to undertake the risk, and that you can afford the risk. And be certain that the broker explains and you understand exactly how much you could lose on a particular investment or investment strategy before getting into it.

Consider whether your broker's comments to you are consistent from one conversation to another. If you suspect that your broker is lying to you, you should confront him and stop all trading until you are completely satisfied that the matter has been resolved.

Put complaints in writing and notify the broker's manager

If you have a problem with your stockbroker or with the trading in your account, you should put your complaint in writing. If it is a serious problem you will want to have a record of the fact that you objected at the time. Make sure that you keep a copy of the written complaint for your records.

If the problem persists, you should send a copy of the complaint to the broker's supervisor or the brokerage firm branch office manager, or write a complaint directly to the brokerage firm office manager with a copy to the broker. This should not be done lightly, but a serious problem should be treated seriously by you if you expect anyone else to take it seriously.

If you fail to put your complaint in writing and keep a record of it for your file, in the future the broker may deny that you ever complained about anything which occurred in the account at that time. Many securities arbitration cases may turn into "swearing contests" with each side accusing the other of lying because there is no written record of complaints from the time of the events in question.

It is very important for the brokerage firm office manager or supervisor to receive a copy of the written complaint regarding a serious or persistent problem, so that they will be put on notice for potential future problems. You may find it personally difficult to notify the manager given a natural desire not to get the broker into trouble with his boss. But the involvement of the branch office manager or supervisor may be important not only to resolve the immediate situation but also for future purposes. If the problem continues or occurs again in the future, you will be in a weaker position if you have not previously complained to the brokerage firm to put them on notice. A common refrain from brokerage firms in defending arbitration claims is: "If the customer really had such a problem, why didn't he complain sooner to the broker's supervisor or the office manager."

Think carefully about the complaint first, before making the phone call and before putting it in writing. Remember, while you do not want to make a frivolous complaint or unnecessarily cause anyone a problem with their employer, you have to do what is needed to protect yourself.

Finally, you may want to request a meeting with the branch office manager and the broker in order to attempt to straighten out the problem. Although this will sometimes be helpful, you should be very careful about what you say and how you say it (just as you should be very careful about what you write in any written complaint), since your words may later be used against you in an arbitration hearing.

Do not ignore problems

If you have a problem with your stockbroker, investments or portfolio account, do something about it. Do not wait. The longer that you do nothing, the worse position you may find yourself in.

If you fail to act in the face of problems, this may lead to further problems. The objectionable activity is bound to continue. Once a broker shows a tendency to bend or break the rules, or to play fast and loose with the truth, you should reasonably expect that this type of behavior will continue. And somehow problems frequently get worse the longer you wait for a broker to "make it up to you."

You should also keep in mind that the longer you wait to do something about a problem, the more you jeopardize your ability to do something about the problem. You may be compromising your own credibility if you let the problem continue or if you do nothing for a long period of time after the problem. Your failure to act may be used against you in order to show that you actually approved of the questionable activity at the time, or that you ratified the activity after the fact.

If you wait for long periods of time while problems persist, until that inevitable, final trade that is the "straw that broke the camel's back," you may find yourself in a weakened position to complain about the earlier activity. The brokerage firm will undoubtedly take the position that you had no problem earlier and that this is just a case of sour grapes based upon the last bad trade, and that the earlier "problems" are just being fabricated now and were not really problems at the time. And what may seem clear to you now may not seem so clear to an arbitration panel years later.

Do something

If you believe that your account is being mishandled, if you believe that your broker is abusing your account or abusing your trust, if you suspect that your broker is lying to you or that you have been a victim of securities fraud, do something about it now. You should not wait to take action until after it is too late. Among other things, you may do any one or more of the following:

  1. Write a letter to the broker;
  2. Write a letter to the brokerage firm branch office manager;
  3. Freeze all trading in the account;
  4. Request a meeting with the branch office manager;
  5. Talk to others about what is happening, including your professional advisors;
  6. Close the account;
  7. Consult with a qualified attorney.