Frequently Asked Questions
While there is no single list of questions appropriate to all investors, the following are 10 basic questions which should enlighten you. If your broker/financial advisor will not or cannot answer these questions clearly and to your satisfaction, perhaps it is time to seek out another investment professional:
(1) What comprehensive financial planning processes do you use before recommending appropriate investments to me?
(2) Do you develop a specific written Investment Policy Statement based upon my personal goals and objectives?
(3) How do you determine what investment vehicles to use in accomplishing my investment objectives? In this regard, are my objectives realistic, given my personal tolerance for risk?
(4) What are your fees and how are you compensated?
(5) Where can I obtain your NASD/FINRA record?
(6) What are you actively doing to prepare for the next downturn/upturn in the market?
(7) What criteria do you use to monitor the progress and development for sufficient retirement funds and what investment criteria are used to protect them after retirement?
(8) How do you determine and report what the annual return on my investments has been over the past year, the past 3 years and the past 5 years? What is the return on these investments net of all costs and fees?
(9) What is, or has been, my portfolio performance relative to other market indexes?
(10) What is the standard deviation? of my portfolio and what is my downside risk? (Standard deviation? is a measure of volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole.)
Investing for returns and the protection of your assets should be done with your knowledge and consent. Knowledge is power and should be shared by your investment professional with you, the investor. The suitability of particular investments and the allocation of your portfolio is a function of your age, total net worth, physical (health) condition, investment goals and your tolerance for risk (loss). Invest wisely with an investment professional who provides you with full, clear and understandable information upon which you can make your decisions.
One additional way to determine the level of commitment of your lawyer to the representation of investment clients is to learn whether the lawyer is a member of Public Investor Arbitration Bar Association (PIABA?), a member organization consisting of lawyers who represent victims of misconduct by investment brokers. PIABA’s website (www.piaba.org) can be searched to determine whether the attorney is a PIABA member. Mr. Pearl of The Pearl Law Firm, P.A. is a former Chair of PIABA’s By-Laws Committee. Another useful service which rates attorneys and their client’s experiences with them is AVVO.com – See Mr. Pearl of The Pearl Law Firm, P.A. on AVVO.com.
When you engage an attorney, be sure to choose one that:
- Principally handles only securities cases
- Has been at it for a long time
- Knows the stockbroker industry inside and out
Unsuitable Investments – Brokers have a legal obligation to learn their customer’s financial goals and the level of risk they can withstand. Brokers may not make unsuitable recommendations, given the nature of the customers investment objectives and tolerance for risk. I would say that the most important and possibly least understood obligation of a stockbroker is that all investment recommendations must be consistent with the customer’s financial status, investment objectives, level of understanding and risk tolerance. Another important rule is the “know your customer” rule, which requires a broker to have reasonable grounds for believing that the recommendation is suitable and appropriate for that particular customer based upon his individual financial situation, level of sophistication and financial needs. For example, it is not sufficient for the broker to claim that he did not know that the customer was relying on these investments to last for the rest of the customers life.
Unauthorized Trading/Failure to follow customer instructions – A broker may not execute trades in a customer’s account unless the customer has approved and authorized the trade in advance, or has given the broker discretionary trading authority (the power for the broker to make trading decisions in the account). A broker simply may not engage in unauthorized trading. If he does, his firm is liable for the losses incurred as a result. In addition, a broker has an obligation to carry out the instructions of the customer. It is almost always advisable to place sell instructions to your broker in writing to avoid a later dispute as to whether those instructions were actually given.
Churning – Heavily trading an account to generate brokerage commissions without regard to a customer’s investment goals. Since stockbrokers are compensated through commissions on the transactions which they execute, there is some inherent tension between the broker’s interests and the interests of the customer. The broker is obligated to recommend trades which meet the needs of the customer, not merely to generate commissions for himself. Churning by a broker involving purchasing and selling securities for the purpose of increasing commissions is expressly prohibited.
Misrepresentations or Omissions – Brokers may not falsely minimize the risks of a security or give false or misleading information about a company. Nor may he omit important information about an investment the broker is recommending. A broker also has a duty to disclose all material information in connection with an investment recommendation. In particular, exaggerated, false or misleading statements are prohibited in a stockbroker’s communications with the public. These types of claims are usually seen in connection with the sale of initial public offerings.
Excessive Commissions – Commissions, as well as markups charged on over -the -counter stock transactions, shouldn’t exceed the rate a customer agreed to. In addition, the size of commissions and markups is regulated by the stock exchanges and the NASD.
Sales of Proprietary Products and Variable Annuities – Many brokerage firms feature products which they themselves package and sell to their unwitting customers as though these investments are the absolute best products available, when in fact the investments carry the highest commissions payable to the brokers, giving the brokers an inducement to sell the products to their customers, regardless of the customers needs. This is similar to a brokers incentive to sell variable annuities to customers without disclosing that companies issuing variable annuities pay the highest commission rate in the industry, the cost of which is ultimately passed along to customers in the form of carrying charges over the life of the annuity and high surrender fees in the event of early distributions from the annuities in excess of the annual allowable amounts. Variable annuities fluctuate in value in accordance with the performance of the investments chosen for the annuities sub-accounts.? Customers are often ill-informed as to the nature of these investments and, like other investments, can be entirely unsuitable for the customer, based upon his or her investment objectives and risk tolerance.
Trading on Margin/Options – Certain forms of investments pose particular problems, and therefore, brokers have additional duties in connection with such activity. For example, trading with money borrowed from the brokerage firm, known as trading on margin, is a carefully regulated activity. Brokers also have special responsibilities in connection with options trading and private placement limited partnerships among other forms of investments.
FINRA Investor Complaint Center
9509 Key West Avenue
Rockville, MD 20850
Fax: (866) 397-3290
If you have been a victim of Stockbroker fraud, Financial advisor fraud, Investment fraud, have suffered Investment losses, Stock losses, or Retirement losses, or need a Securities attorney, please contact us today for a free consulation.