(ran PT, HT, CI)
Over the last few years, below-average interest rates have prompted traditional savers _ many of them elderly _ to shift funds from insured bank accounts to riskier investments promising higher returns.
As a result of recent market downturns, some of these novice investors have lost money and are now blaming these losses on their banks, their brokers and their financial advisers.
Losing money is not necessarily grounds for legal action. Investments are inherently risky, even well-run mutual funds and blue-chip stocks and triple-A-rated bonds.
But sometimes there are grounds for legitimate complaint _ and steps you can take to resolve problems.
While most brokers are honest and capable, the relatively recent explosion of investment opportunities has increased the number of financial advisers and others who sell investments _ and likewise increased the chances of an unwary investor losing all or part of his or her nest egg due to an adviser's misconduct or incompetence.
Here are some common problems:
Unsuitable investments _ This is one of the most common abuses by bad brokers. If you or a family member can show that the recommendation was unsuitable for your specific situation, there may be grounds for a complaint. For example, anyone who recommends putting a 75-year-old widow's life savings in an aggressive-growth mutual fund would generally be considered to be giving unsuitable advice. The risk of and potential for loss of any investment should be fully disclosed so you can weigh it against your goals and decide whether it is suitable.
Misrepresentation _ Sometimes the performance of an investment is represented as being similar to another ("It's just like a CD") when, in fact, it is quite different and often riskier. If you can show that this has happened, you may have grounds for a complaint. Educate yourself about investments, and don't buy anything you don't understand. The best defense is never to rely completely on a broker for information. Always do your homework or seek the advice of another professional.
Churning _ This is excessive buying and selling of a client's portfolio just to reap sales commissions, but it's difficult to define. What's churning for one client may not be for another. In general, if commissions are more than your gain in earnings, or you must earn high gains just to cover commissions, you probably have grounds for complaint.
Unauthorized trading _ This is dangerous and illegal. Brokers cannot trade in your account without your permission. Too often, investors unwittingly give a broker written blanket authority to buy and sell when they open an account. Use caution before granting such authority, known as a "discretionary account," and monitor all transactions. Check your monthly statement to make sure your broker isn't making purchases you didn't approve or buying more shares than you authorized.
Dishonesty _ Lying or concealing information about an investment is fraud and definite grounds for complaint. Some brokers have been known to actually steal from their clients' accounts. Again, check those monthly statements carefully.
If you believe you have been ripped off by your broker, there are several steps you can take:
Talk to your broker or the brokerage firm. There may be just a mixup in the paperwork. If it's more serious, the firm may repay your losses. Keep dated notes of all conversations and create a record by writing the branch manager summarizing each call; keep copies of the letters.
If you don't get satisfaction, file a grievance with your state department of securities and the National Association of Securities Dealers. These organizations regulate brokerage firms. The NASD's toll-free investor hotline at (800) 289-9999 can tell you if criminal or civil actions have been taken against your broker or his or her firm.
If that doesn't work, arbitrate. In general, arbitration is cheaper and faster than a lawsuit, which usually is not a realistic path unless hundreds of thousands of dollars are at stake. Investors in all 50 states can opt for noncourt, binding arbitration to recover losses, lost interest and, in some cases, punitive damages. Clients prevail in about 60 percent of the cases, according to a 1992 General Accounting Office study.
To learn more, contact the American Arbitration Association at (212) 484-4000 or any of its 35 regional offices. Other information sources include Investors Arbitration Services Inc., which publishes a free booklet, The Six Biggest Mistakes Investors Make . . . After They Have Been Ripped Off. For a copy, call (800) 678-8185. Or call the Securities Arbitration Group Inc. in Marina Del Ray, Calif., at (800) 222-4724.
Mary Beth Franklin writes the personal finance column for Maturity News Service.
1994, Maturity News Service