Protecting Yourself From a Dishonest Broker
A recent Los Angeles Times investigation revealed that unscrupulous stock brokers who cost their clients millions continue to operate in the brokerage industry.
Despite being accused of churning accounts, making unauthorized trades, forging customer signatures and misrepresenting investments, these brokers frequently go from one big firm to the next, leaving a trail of arbitration judgments and regulatory sanctions behind.
There are far more honest brokers than bad ones, but the repercussions of dealing with a dishonest broker can be devastating. Investors tell horror stories about losing their life savings, losing their retirement money and suddenly not having enough set aside to pay medical bills.
With stakes this high, it makes sense to protect yourself. Here’s how.
* Don’t invest over the phone with someone you don’t know.
Some of the biggest abuses start with a “cold call.” A broker phones to pitch a particular investment. The deal may sound terrific. But you don’t know the broker or whether the investment is being misrepresented. The more anxious the broker is to make a sale now, the more likely that the investment is a bad deal.
* Don’t be afraid that you’re being rude.
If a broker uses hard-sell tactics--”There’s no time to send you a prospectus--this investment won’t be available in a week” or the classic: “If you can’t make a decision, why don’t you put me on the phone with someone who can?”--just hang up. If the broker continues to harass you, get his full name and the name of the brokerage and report them to the California Department of Corporations or the Securities and Exchange Commission.
* Scrutinize your new account statement.
The new account statement usually includes information about your investment objectives, your income and your assets. Make sure it’s accurate. Brokers are barred from selling you investments that are inappropriate for your situation and goals. This form can be evidence of wrongdoing if the broker breaks the rules.
* If you have an existing account, periodically write to your broker restating your investment objectives.
The letter can be simple: “Dear Jane: It has been (number) years since I opened my account, but I wanted to let you know that my investment objectives remain the same. I am looking for investments that guarantee the safety of my principal, while providing a steady income . . . “ or whatever the case may be. If your investment goals have changed, state what they were in the past and what they are today. Keep copies of the letters with other investment information, such as account statements, etc.
* Check your broker’s record with state regulators.
The California Department of Corporations has information about disciplinary actions, complaints and arbitration awards against individual securities brokers. (Requests must be made in writing to: Department of Corporations, 3700 Wilshire Blvd., 6th floor, Los Angeles, 90010. There is also an office in Sacramento.)
Each state has slightly different rules about what information can be released, but in many states, regulators will reveal a good portion of the file to consumers who ask.
There is also an 800 line operated by the National Assn. of Securities Dealers that supplies some broker information. But it heavily censors information, which can cause a broker who has a long history of alleged abuse to get a clean bill of health.
* Read monthly account statements and review all trading confirmation notices.
Many of those who say they’ve lost thousands of dollars because of trading abuses acknowledge that they would have lost far less had they paid attention to their monthly statements. In some cases, abuses were not discovered until years later, when the account had dwindled to virtually nothing.
Courts and arbitrators often view such customer carelessness as implied consent. And they’ll often greatly reduce award amounts--or fail to award damages--because of it.
* If you see an error or something you don’t understand on a statement, tell your broker immediately.
If the broker can’t explain it, ask the branch manager. If you’re still not satisfied, call state securities regulators. (They’re usually listed in the government section of the phone book. In some states--like California--the Department of Corporations handles securities complaints, while in others complaints should be made to the Secretary of State’s office.)
* Invest only in things you really understand.
Often the best investments are the simplest ones. Don’t abandon your own good judgment just because someone else tells you they’re an expert. It’s your money. That makes it your decision. If you don’t understand why you should say yes, say no.
