Many investors who are abused by their brokers are themselves responsible for violating one or more of the basic rules of investing. Here are some guidelines, offered by the North American Securities Administrators Assn. and other experts, to help you avoid disaster and become a better investor:
- Never invest in anything you don't fully understand. Do not invest in something that you feel uncomfortable with, even if your broker tells you it is a great deal. Remember, you are the boss.
- Make sure you understand how much money you have at risk in any investment, and how much you can lose in a worst-case scenario. Never invest more than you can afford to lose.
- Avoid discretionary accounts, in which your broker has broad powers to decide on trading moves without your specific consent.
- Avoid brokers and other advisers who pitch investments paying high returns with little or no risk. If those investments sound too good to be true, they probably are. Investments that earn higher returns almost always carry higher risks.
- Diversify. Never put all your money into one type of investment.
- Insist on receiving copies of all records and other documentation in your accounts, and keep copies of your own correspondence. Take notes of all conversations with your advisers; even consider taping them, as long as you get the other party's permission so you don't violate state law. You may need such documentation in any dispute.
- If you see an irregularity on your account statement, such as a trade you did not authorize or don't understand, call or write your broker for an explanation. If it happens again, consider closing the account.
- Avoid get-rich-quick investment schemes sold by telephone salesmen you have never met. These swindlers almost always come out of the woodwork following market downturns to prey on investors who have pulled their money out of stocks.
"We've seen it before in market downturns much less dramatic than this," said Scott Stapf, spokesman for the North American Securities Administrators Assn.
If you have a problem with a broker, here are some steps to follow to lodge a complaint:
- Consider discussing your problem with another broker. Competing brokers often will be happy to advise you, with the hope of getting your business, says Michael Friedman, a Pasadena attorney who represents investors.
- Seek to resolve the problem with your broker. If that doesn't help, contact your broker's manager or the branch manager, preferably in writing. Ask for a response in writing.
- If that doesn't help, write the firm's chief compliance officer, usually located at the firm's headquarters. The name and address should be available from the brokerage. Request a response in writing.
- If you are still dissatisfied, demand in writing that your broker close your account.
- Notify appropriate regulators and exchanges of your complaint. Call a complaint hot line established by the North American Securities Administrators Assn. at 800-942-9022.
In California, the appropriate state regulator is the Department of Corporations at 213-736-2569 or 415-557-1556.
Complaints about stockbrokers can also be addressed to the Securities and Exchange Commission (Office of Consumer Affairs and Information Services, 450 15th St. N.W., Washington, D.C. 20549; 202-272-7440) and the National Assn. of Securities Dealers (Surveillance Department, 1735 K St. N.W., Washington, D.C. 20006; 202-728-8000).
Some of these agencies may be willing to provide referrals to attorneys who handle investor complaints.
- Consider arbitration or legal action. Arbitration panels are operated by the NASD, New York Stock Exchange and many other exchanges. Panels also are provided by the American Arbitration Assn. (140 W. 51st St., New York, N.Y. 10020; 212-484-4000), which some investors believe is less biased than the industry panels.
Write them for instructions on how to file for arbitration.
If your claim is less than $5,000, you can use a small-claims arbitration process under which both sides simply submit written documents detailing their arguments and defenses.
Legal action through the courts typically takes far more time than arbitration and is more expensive, so it is only advisable in cases of large losses. However, your broker may have required you to sign an agreement when you opened your account that specifies you will take disputes to arbitration instead of the courts.
More details about these and other steps are contained in a booklet "Coping With the Crash: A Step-by-Step Guide to Investor Rights." It can be obtained by calling the North American Securities Administrators Assn. hot line or by writing it (the association) at 555 New Jersey Ave. N.W., Suite 750, Washington, D.C. 20001.