Four common problems people have with stockbrokers

Misrepresentation

Misrepresentation can occur when a broker purposefully makes untrue statements of facts or fails to give you information that would be material to your investment decision.  This can happen in any security in any account.  A frequent misrepresentation involves an understating of the risk involved. 

 How will you know?

• You lose more than you thought you could
• You find out important information after you make your purchase
• Written material, such as annual reports or prospectuses don’t agree with what the broker is saying
• Its hard to get information about the investment

How To Avoid This Problem

• Ask the broker to send you information that will back up his/her representations.
• If you rely on your broker, make sure the investment meets your objectives; and make sure you understand and are comfortable with the risk, costs, and liquidity of the investment. Never invest in a product you don't understand.
• Independently verify information by thoroughly reading a prospectus, research reports, offering materials, annual reports (10k), quarterly reports (10q), brochures, or other documentation.
• Keep contemporaneous notes of your conversations with the broker.

High-Pressure Sales Calls (Cold-Calling)

High-pressure sales calls (sometimes referred to as cold-calling) occur when an investor receives unsolicited or unwanted phone calls-using high-pressure, persistent tactics-soliciting the purchase of securities. This is most frequently found with low-priced, speculative securities. You may also be solicited for high yield notes, viaticals or other private investments.  

 How will you know?

• Broker pressures investor to invest quickly to avoid missing out on a “once in a lifetime opportunity”, indicates that the offer is “good today only”, or makes claims that seem too good to be true.
• Investor receives frequent phone calls. Caller is badgering, insulting, or claims to be an expert (has “inside information,” etc.)
• Investor is subjected to the three-call system – (1) investor receives an introductory call; (2) broker calls again to touch base and to develop a comfort level with the investor; (3) call is a sales pitch or an enticement to buy.
• Investor may be asked to sell a listed or more well-known security for an obscure, broker-recommended product.
• If it sounds too good to be true, it isn’t true.

How To Avoid This Problem

• Hang up
• Ask the caller to put every thing in writing
• Ask for references you can call
• Meet with your broker and visit the firm, if possible
• Read all of the paperwork you receive.
• Ask a lot of questions.

Unsuitable investments

A suitability problem can involve any security and occurs when an investment made by a broker is inconsistent with the investor's objectives and investing profile (e.g., age, financial status, long-term goals, income, and net worth of the customer).  For instance, the broker encourages an investor to purchase an investment that the broker wants vs. an investment that may be best suited to the investor. An example of such an investment would be a recommendation to make a significant investment in a highly speculative security to an investor with a fixed income or the need for monthly income.

 How will you know?

• You lose more than you thought you were risking.
• Other brokers or securities and tax professionals point out suitability issues.
• Investor researches stocks, bonds, etc. through different sources which reveal that the investment does not fit the customer's investing profile.
• Investor reviews documents, such as offering memorandum, monthly statements, or other sales materials which reveal that the investment does not fit the customer's investing profile.

How to Avoid This Problem

• Read and understand the terms of any new account agreement you may be asked to sign with the firm. 
• Understand and agree to what is being purchased before the transaction occurs. If you can't explain it, don't buy it.
• Provide the firm with accurate information and don't inflate your net worth, income etc. Be candid about disclosing financial constraints. Doing so would help prevent running into a problem.
• Ask to review what is on file at the firm regarding your account, such as a new account form with client profiles, margin account agreement, options account agreement, discretionary account agreement, etc. You have the right to know what is on file about you, and information must accurately reflect your objectives - age, financial status, long-term goals, income, net worth, etc.
• Do your homework, review prospectus material and conduct other research.
• Thoroughly read and retain your monthly account statements, confirmations, and any other information you receive about your investment transactions.
• Be proactive, ask questions (How is this in line with my investment objectives? What is my risk of losing money on the investment? What has been   the past performance of the investment? How liquid is this investment, and what are the costs of liquidating the investment and other barriers to sale?).
• Keep good records of communications with the broker. Contemporaneous notes of your conversations with the broker will help. Also, repeat your sense of the conversation to ensure you both have the same understanding. Be careful not to be the victim of miscommunication. For example, when a broker says "can I put you down for x shares" he really means can I purchase them for you.
• Can you afford to use margin or other credit? If you can, know exactly what to expect and under what conditions you may be required to pay additional funds should the price of the security drop.

Unauthorized Trading

Unauthorized trading involves the purchase or sale of securities in a customer's account without the customer's prior knowledge and authorization. This can occur with any security. For example, the broker may believe a transaction is in the investor's best interest but cannot or does not contact the investor, and then makes the trade anyway. Or, the broker attempts to convince the investor of the benefits to the transactions in the hopes that the investor ratifies trades after the fact. Remember, brokers generate commissions through executing transactions (sales or purchases). That is why you should pay close attention to activity in your account.

How will you know?

In most cases, unauthorized trading is discovered through reading confirmations and regular account statements. This may occur when the customer receives a confirmation in the mail for an unknown trade. In many instances, these transactions involve existing assets in the account and do not require client payment. In some cases, an existing asset may be liquidated to fund the purchase of a new security.

How to Avoid This Problem

• Always repeat instructions to your broker to promote a clear mutual understanding of the transaction.
• Document (keep notes) all conversations with brokers.
• Thoroughly read and retain, in a timely fashion, your monthly account statements, confirmations, and any other information you receive about your investment transactions.
• Take immediate action if you see a transaction you do not recognize. Time is critical. Reconcile any discrepancies at once. Contact the firm's branch manager. And, send a telegram, or registered or overnight letter to the compliance department of the firm refusing the purchase. Also, follow up with a phone call to the firm's compliance department. The longer the lag time, the less substance and credibility your argument has.