Market slide calls for more care in using stockbrokers

For many people, the most ominous sound of last week's debacle on Wall Street was a telephone busy signal. Tales of investors who couldn't reach their brokers on the telephone - or any other way - were almost as commonplace as a sell signal. Tales were frequently told of investors who wanted to get out of the market but couldn't. These stories included some who didn't belong in riskier investments.

``I have one client who went to a broker on his own, without telling me,'' said Charles DeRose, a financial adviser in New York. ``The broker put him in something known as a `conservative straddle' using puts and calls.'' But the broker failed to warn the client that the call portion of that straddle was a ``naked call,'' with no limit on how much he could lose, Mr. DeRose says.

``The guy is a civil servant who put down $90,000 collateral,'' he says. Before last week was over, the man was over $250,000 in debt to the brokerage.

The fallout continued this week. Twenty minutes before the market opened yesterday, for example, an investor tried to call his local Charles Schwab & Co. office to place a buy order. By the time his call got through 25 minutes later, the market had opened and the stock had gone up 4 points.

Clearly, one of the many outcomes of this debacle will be - or should be - a new relationship between brokers and their clients. While that relationship must still be partly built on trust, investors will have to be better informed about what their brokers are doing and make sure their assets are in a diverse range of stocks, bonds, money market instruments, and bank deposits.

``[Full-commission] brokers don't get paid to just sit there,'' DeRose points out. ``They get paid only if there's a transaction. For many people, the best thing to do is nothing.''

Or, as one investor said: ``I haven't called my broker. As long as my stocks are paying the dividends, what difference does it make as long as the price is above what I paid for it?''

That type of investor probably avoided another major problem of last week's slump: margin calls. These happen when investors who have borrowed part of the purchase price of an investment see the value of that investment slide. Brokers then make margin calls to those investors asking them to put up more cash to cover the lower value of the stock collateral, or sell some stock.

For one brokerage, margin calls were not only the undoing of some of its investors, they were the undoing of the company itself. H.B. Shaine & Co. of Grand Rapids, Mich., collapsed Oct. 19 because it was unable to cover its clients' debts when those customers were unable to respond to margin calls.

The next day, the company was taken over by the Securities Investor Protection Corporation, a federal agency that protects investors much as the Federal Deposit Insurance Corporation insures bank deposits and arranges mergers betwen a failing bank and a stronger one.

While the SIPC arranges mergers, it also insures customer accounts up to a maximum of $500,000 for cash and securities, with a $100,000 maximum on cash alone.

However, says Stephen Harbeck, SIPC's associate general counsel, ``SIPC does not insure against the vagaries of the market or against unsound investment advice. SIPC only gets involved if the broker becomes insolvent and the accounts are insured as of the date of insolvency.'' If a stronger firm can be found, a merger is arranged instead of a payout, he said.

In Shaine's case, SIPC put it together with a Chicago brokerage two days later, on Oct. 22. But for at least three days, Shaine customers who had left their securities with the brokerage could not touch them.

The practice of leaving securities with the broker, or in the ``street name,'' is fairly common and, in more normal times, it makes trading easier, since an investor does not have to personally bring the stocks to the brokerage if he wants to sell them.

For some investors, this may argue for keeping at least a portion of their stocks in their own possession. Then, if they can't get through to a broker on a bad day, they can at least carry them to another broker if they want to sell.

For the near future, at least, investors should be prepared for more delays and the possibility of more frequent mistakes. Horrendous volumes aren't just a problem for the stock exchanges; they're a problem for brokers, too.

``I don't think the industry is up to dealing with the heavy volumes we're going to be having,'' says Allen Mottur, head of the financial services group at Temple, Barker & Sloane Inc., a consulting company in Lexington, Mass.

Investors will now have to keep even more scrupulous records and, when possible, make a follow-up call a few days after the transaction to make sure their records jibe with those of the brokerage.

Finally, in times like these, investors who frequently use discount brokers may want to bear the expense of a full-commission broker for a while. ``It's normally OK not to use a full-service broker,'' says Steven Enright, director of Seidman Financial Services, a division of Seidman & Seidman, the accounting firm. ``But those who had full-service brokers seem to have had an easier time accessing their accounts.''

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