Investors have become painfully aware over the past several years that incompetence and fraud are not anomalies among investment firms on Wall Street and elsewhere. Regulators have proven that they are not able to protect investors from this ongoing wrongdoing. As times become difficult for everyone, investment firms and their advisors are getting creative about how they market themselves to new customers. Some offer free seminars complete with lunch or dinner. Some even prospect for customers at church.
Without the information you need, you could unwittingly trust your investments to a broker with a history of customer complaints. Here are some general tips to avoid this common pitfall as well as other tips to help you protect yourself from incompetent and unscrupulous stockbrokers, investment advisors, financial planners, and other investment professionals.
I. Investigate Your Stockbroker
In 1981, the National Association of Securities Dealers, or NASD, developed a system called the Central Registration Depository, or CRD. The CRD system contains a history of almost every registered stockbroker as well as many other investment professionals working in the United States. The CRD generally includes each broker’s employment and licensing history as well as some records of customer or regulatory complaints against the broker.
You can and should obtain a CRD report on vernonhealy.com broker or any broker you are considering hiring. The report is free and available to the public through most states as well as FINRA (formerly known as NASD). For additional information on how to obtain a CRD on a particular broker, contact FINRA or your state securities regulator or contact us through our website or toll free number at 1-877-649-5394. We will assist you in obtaining this information at no charge. For an upstanding investment professional, the CRD report will reflect that he or she is qualified and free of past problems with customers, employers and regulators. If this is not the case, you should reconsider with whom you are entrusting your money.
II. Know What your Investment Professional Should Do For You
In addition to investigating the individual investment professional, you should also investigate the brokerage firm where your accounts will be held. Given the financial turmoil of the past several years, you should work with a firm hat generates more than $100 million a year in revenue or carries $20 million or more in errors and omissions insurance. Although you need not and arguably should not work with a giant national or international firm focused more on marketing than the best interests of the investor, you do need to work with a firm that has more than just SIPC insurance, minimal errors and omissions insurance, and a few million in revenues. You should ask about firm revenues and firm errors and omissions insurance and obtain supporting paperwork before doing business with a smaller firm.
II. Know What your Investment Professional Should Do For You
After you select the investment firm and professional, they should commit to do the following:
1. Help you define your needs and comfort level in terms of risk, including liquidity risk, as well as ensure that you understand the corresponding levels of anticipated return;
2. Provide you with impartial advice and objectively educate you about any investment you are considering or that is being recommended to you and help you avoid investments which are inferior, inherently defective, not in your best interests or unsuitable for you;
3. Help you establish, implement and maintain a long-term and specific investment plan that includes an appropriate asset allocation, diversification, liquidity and principal protection policy;
4. Monitor your portfolio and economic and other events that may affect your portfolio as well as your personal situation and advise you promptly about any adjustments that need to be made, especially adjustments to protect your principal; and
5. Fully and accurately disclose all compensation or other financial benefit flowing to the investment professional as a result of your investment in the product or strategy being recommended or proposed. Most importantly, your investment professional should provide you with these services on a continuing basis.
III. Recognize the Danger Signs
Once you have selected an investment professional and firm and established the ground rules for the relationship, you need to stay vigilant for any “red flags,” including the following:
1. “Mistakes” or “miscommunications” by your ivestment professional or the firm. Catching these on minor matters may help you to move your account before you discover that these mistakes or miscommunications are due to incompetence or fraud that causes material damage to you.
2. Lack of adequate and genuine communication by your investment professional once he or she has fully invested your funds — after the initial “sale” is completed. By moving your account as a result of communication problems, whether they are in frequency or quality, you may avoid a situation where your investment professional and his or her firm are unwilling or incompetent to adequately explain financial matters relevant to your investments or unavailable to you during a personal or market crisis.
3. Lack of full and unsolicited transparency of fees. Your investment professional and his or her firm should voluntarily provide you with the details of all fees that will result from the maintenance of and activity in your account(s). This is not only relevant for determining net returns but also very important for you to determine whether the investment professional is
actually acting in your best interest as opposed to being financially motivated to sell the particular product or service being recommended to you. Although some of these fees may not be directly paid by you, they may nevertheless constitute a significant conflict of interest that is improperly
motivating the recommendation.
4. High fees. Given the low returns in today’s investing environment, high fees can materially affect your returns. Make sure that you are consciously choosing, receiving and benefitting from the services being provided in exchange for the fees being charged. High fees may be justified, but oftentimes investors are paying unnecessarily high fees for services they are not using or that are not competently being provided.
Using the tips in this article will help you to move away from incompetent and unethical investment professionals and convince you to either avoid investment professionals altogether or find a competent and ethical one to invest your money.
