A Good Market Tip: Get to Know Your Broker Before You Write That Check

A Good Market Tip
Get To Know Your Broker Before You Write That Check

What Are The Problems When Dealing With An Investment Professional?

There are only a few kinds of problems that may arise in your investment accounts with any degree of frequency. These are:

  • Brokers are required to recommend only investments that are "suitable" given your financial goals and the amount of risk appropriate for you. This is called the "know your customer" rule.
  • The broker must get your permission prior to the execution of any trade in your account unless you have given him or her written discretion over the account. Violations are called "unauthorized trading."
  • The broker is required to be truthful and complete in presenting investment opportunities to you. Violations are "misrepresentations or failures to disclose material facts."
  • The broker cannot trade excessively in your account to generate commissions for himself or herself. Such excessive trading is called "churning."
  • And unfortunately, sometimes a broker engages in actual theft.

Who Are Investment Professionals?

The terms used to describe investment professionals are confusing. Traditional sources of investment advice are stock brokers, banks, and occasionally a real estate or insurance agent. However, in recent years, new terms like financial planner, investment advisor and account manager are also being used. The following may help clarify these terms: 

  • Investment Advisors: are those in the business of providing advice to others, either directly or through publications, about securities. Although the term generally applies to a firm, it is also used to describe a representative of the firm. Both the firm and its representatives are required to be licensed with the state.
  • Financial Planner: is just another name for an Investment Advisor. The important thing to remember is that the person must be in the business of providing securities advice for compensation.
  • Stock Broker: is a sales person employed by a Dealer who buys and sells stocks and other securities and is paid by commission. Brokers frequently use other titles such as Account Executive, Account Manager, etc. Increasingly, brokers are employed in the brokerage subsidiaries of banks, which may cause confusion for their customers. Brokers and their firms are licensed with the state and federal regulatory authorities.


How Do I Choose A Professional?

My relationship with an investment professional must be one of trust and confidence. I will be asked for detailed financial information and my personal goals. I should not enter into such a relationship without careful consideration, including learning about the professional's education, employment history, disciplinary record and values. There are several steps I can take to ensure that my new financial advisor will be a good "fit."  

  • I can ask friends and relatives for suggestion about investment professionals they know or have used for their own financial plans. The best information often comes from those who know the professional from first hand dealings.
  • I can check the records. Most investment professionals are licensed by the Securities Division of the Secretary of State's Office. They can provide me with detailed employment history, examination results and disciplinary record. In some cases, they can also provide education and personal background data. Call 1-800- 758-6440.
  • I can interview several prospective investment advisors. Even after a background check, my trust or comfort level will depend on the personal chemistry between the professional and me. During the interview, I will ask how I will be charged for the services. In the case of brokerage firms, I will usually pay a commission on transactions, but I may also be charged a fee for planning services. Non-broker planners may charge a flat fee or be commission-based or a combination of the two. I will ask for a copy of the contract.

How Do I Work With My Advisor?

In any professional relationship, problems can occur. However, there are certain steps I can take to minimize the chances of such problems arising. These include making sure that my financial profile and investment goals are clearly understood by both the professional and me. I will look at the new account card, verify the information and secure a copy for my records. Over the years, if my goals change, I will be sure my account card is updated and that I have a revised copy. I will review and keep all of my investment records, including account statements and transaction records. I should make notes of any telephone conversations I may have with my broker. In case of a dispute, complete records made contemporaneously with the event are the best evidence.

I will be alerted by "happy letters." These are letters sent out by brokerage firms asking if I am satisfied with my account and representative. Frequently such letters are sent when the firm suspects there is a problem, and should be taken as a warning that it may be time to investigate any unusual events. I will write back to the firm and ask why they contacted me in the first place.

What Do I Do If Problems Arise?

If I suspect a problem with my account, I should not delay. I will contact the investment advisor, explain the problem, state what I want done to resolve it, and set a time-frame for its resolution. I will keep copies of all correspondence and notes concerning telephone conversations or meetings.

If the problem is not resolved, I will contact the branch office manager in writing. If this does not produce a resolution, I will contact the firm's compliance division. I will send a copy of this letter to the Securities Division.

When I opened my account with the firm, I may have signed an agreement that all disputes would be arbitrated. If a resolution cannot be reached through the compliance division, I may enter into arbitration where a hearing will be held and an impartial panel will determine outcome. At this point, I should consider retaining an attorney, although this is not required

I understand that prevention is the best medicine. I will make a thorough investigation before hiring an investment professional and will diligently supervise my assets. I may call the Securities Division at 800-758-6440 for help with the pre-hiring investigation.