When your broker fails you
You get a telephone call from your broker, who is pushing what he calls a conservative investment. It turns out to be a highly speculative oil venture that ends up costing you a lot of money after some of the partners pull out.
You tell the broker to sell a stock at the opening of trading tomorrow, but he doesn't make the trade until the end of the day - after the stock drops two points.
You only make occasional forays into the stock market, but lately you've been getting calls almost every day - to the point of annoyance - from your eager young broker, suggesting everything from limited partnerships to the latest new high-tech issue.
Problems like these have always been a part of dealing with stockbrokers. But the last problem is happening more often these days as brokers, many of whom were hired in the stampeding days of the bull market that began in August of 1982, are being told to sell more stocks and other products or find another job. Short of this, some companies are telling their brokers that if they don't have gross sales of more than a certain amount, say $100,000, their commissions will be cut.
Since both of these prospects are distasteful to someone trying to make a living, brokers are getting increasingly aggressive and in many cases are having more trouble playing by the rules of the business. In addition to the problems already mentioned, investors are often advised to watch out for brokers who ''churn'' an investor's account by encouraging or making needless transactions to generate commissions, or who make unauthorized transactions without the investor's knowledge or consent.
Not all the problems with brokers these days are due to overzealousness, dishonesty, or sloppy work. Many brokers are simply not as well educated as they should be about all the new investments, financial service products, and their risks, a staff member at the Securities and Exchange Commission says. The recent surge in Ginnie Maes - mortgage-backed certificates sold by the Government National Mortgage Association - has led to problems when brokers didn't know exactly how they work, the staff member said. A broker might, for example, fail to explain the risks of early repayment of the securities in a Ginnie Mae portfolio.
If you think your broker has made a mistake or bent the rules, there are several routes of recourse you can take, starting with a phone call or interview with that broker, ranging up to a lawsuit. In between are remedies such as complaints to the SEC and binding arbitration.
Before all of this, however, there are ways to keep problems from coming up in the first place. First, many investors simply do not rely on their brokers for advice and have an agreement - often in writing - that no trades will be done without the specific authorization of the customer. These investors do their own research or rely on independent investment advice and simply use the broker to execute trades. This is one explanation for the growing use of discount brokers, although if you have a full-service broker you trust, the advice may be sound. You still might want to check it out before placing an order, however.
Second, all instructions to the broker are made in writing, even when an order has been placed by phone. If a phone order is made, the customer will send the same instructions in a follow-up letter and keep a copy for his records. Also, the customer should take notes when talking with the broker, showing what both said. These notes will come in handy later if there is a dispute about who said what.
Third, many investors use more than one broker, often without telling the different brokers they are doing this. This way, they can spread their money among several brokers as well as several investments, as well as use one broker to check something recommended by another. No broker can be totally up to date on all good current investment opportunities, so if you get a call from one broker suggesting a certain stock, you can call the second broker and ask him or her to look into it.
Fourth, not all of one's capital should ever be put into any one investment, except federally insured bank accounts. Take your account away from any broker who suggests otherwise and tell the branch manager why you are doing this.
If these tactics of policing your broker don't work, you can begin the process of complaint, arbitration, and possible legal action.
Start with the offending broker. When you explain how your instructions, stated financial goals, or information about a particular investment differed from what the broker did, he or she may see the wisdom in arranging an immediate settlement.
Your second recourse is to complain to the brokerage firm, starting with the branch manager. Beginning at this point, all oral complaints should be accompanied by a written one that clearly lays out how you feel you have been harmed, where you think the broker went wrong, and all related facts, such as dates, the amount of money lost, and a listing of securities involved in the case. A copy of your letter should go to the compliance department of the brokerage firm's home office, which will be the next step in your complaint process.
''We do try to deal with all the complaints that come in,'' says Daniel Breskin, vice-president for compliance at Advest, a brokerage based in Hartford, Conn. ''That is, unless the letters come from an attorney. Then they go to our legal department.''
If writing the branch manager or head office doesn't produce satisfactory results, complain to the SEC. Address your detailed letter to Securities and Exchange Commission, Office of Consumer Affairs and Information Services, 450 Fifth Street, NW, Washington, D.C. 20549. The SEC may go to the brokerage firm to find a resolution, but don't worry about this; an inquiry from the SEC probably carries more weight than your complaint.
The last step, short of a full-fledged lawsuit, is arbitration. Even though it is binding, and investors win only about half the time, this has not deterred a growing number of brokerage customers from selecting this method, offered by many of the major exchanges. If an amount less than $2,500 is in question, it will cost $15 to handle by mail and $50 if you want a full hearing. Larger disputes are usually heard before a full arbitration panel and can cost up to $ 550, for claims of $100,000 or more.
If a big amount is involved, however, you could be better off going to court. At this point you should consult a lawyer. In fact, you may want a lawyer at the arbitration level; the brokerage will have at least one there.
While you do give up your right to go to court when you agree to arbitration, you cannot give up the right in advance. Brokerages used to make customers sign a statement that all unresolved disputes would be settled by arbitration, but the SEC ruled in 1979 that they could not do this.
If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.