Many people put their broker in the same category as their doctor, their lawyer or their CPA. For some brokers, that level of trust and faith is appropriate; however, what consumers need to appreciate is that some of the most successful brokers are more likely great salesmen than great financial advisors. Here are some things your broker won’t tell you. Also, I’ve suggested some questions to get answered before you do business.

I. "I AM REALLY JUST AN ORDER TAKER.”

Financial advisors typically will focus most of their sales efforts on products recommended by their firm. Even when they recommend a position, most prudent brokers will want to make sure that you understand that the decision on what to invest in is solely being made by you. (That is even if you have had almost no experience in selecting between various investments and the broker has offered few real options.) This is why we frequently face a defense in securities arbitrations that essentially says, “I am no more than the waiter at the local deli. I just took your order. I can’t help it if you don’t like what you chose.”

Questions to ask:

1. Do you watch out for your customer’s interests after the sale? If so, how do you do this?
2. Can we schedule a periodic review of my financial situation? If so, how often do you recommend we do so?

In keeping with this “I am an order taker” philosophy, your broker may not tell you...

II. "DON’T HAVE A CRYSTAL BALL.”

Your broker may have some insights into how the market works, but no one, that’s nobody, in the short term can predict the market. Although in the income based area, there are some certainties, such as the income generated and the security of a $100,000.00 Certificate of Deposit, when it comes to investments in the stock market, predictability is a much less certain thing. Yes, there are studies and analysis made on how the stock market over the long haul, but good financial planners realize that the market is just too big and complex for anyone to really predict what will happen to any given stock on any given day. If a broker wants to give you “special” or even “secret” knowledge about the market, be very wary and ask questions, such as:

1. Where do you get the information for your recommendations?
2. Should I be looking at having some of my money in accounts managed by people with significant experience or education?
   So these questions may lead you to uncover another bit of information that your broker may not disclose.

III. YOUR LEVEL OF EDUCATION MAY BE HIGHER THAN MINE.

Many people put their financial advisor on a high pedestal of knowledge, but actually to become a broker, no college degree or even high school degree is required. If your financial advisor is a registered representative of an NASD member, he must hold an NASD license (Series 7). The Series 7 exam is usually preceded by a class approximately 40 hours in duration. This is why, in most cases, the broker salesmen are keyed to sell you what their bosses are recommending rather than spending significant time looking at your specific needs and risk tolerance. So don’t be afraid to ask:

1. What educational training do you have to prepare you for this work?
2. Do you hold any advanced degrees or training in financial management such as: a.) College or graduate degree? b.) Certified Financial Planner (CPF)? (less than 15% of all salesmen hold this designation. Those that do have generally learned more about their duties and have come to realize they are held to a higher standard.) The insurance industry offers an advanced vocational certificate called a Chartered Financial Consultant (ChFC) while financial planning accountants can seek the designation as Personal Financial Specialist.

You are in pretty good hands if one of these designations is coupled with a good number of years experience, continuing education and most importantly, integrity and ethical values. So don’t be afraid to ask:

1. What is your training?
2. If I am going to trust you for your advice will you reduce your recommendations to writing?
3. What is the process you go through to get to know me?

The primary duty in the financial planning industry is to “Know your customer.” How is your advisor going to make a recommendation if she doesn’t know you? So, if you don’t know after your first meeting, the broker may not tell you...

IV. WHAT I RECOMMEND MAY HAVE MORE TO DO WITH WHAT MY BROKER IS “PUSHING” AND ABOUT WHAT I MAKE ON A SALE, RATHER THAN YOUR NEEDS.

We have had securities arbitrations in which I asked a broker why he sold a particular investment and his response was “because that was the only one I had in my briefcase at the time.” Whether your broker wants to admit it or not, he is your fiduciary. That means his or her obligation is to deal with you fairly and to know all about you. That broker referred to above had a hammer in his briefcase and every customer was a nail. Refuse to be a nail. Put your goals and objectives in writing. Keep a copy of it and mail it to the broker.

You need to make sure that your broker sees your whole financial picture, not just the part she wants to deal with. (By that, I mean, the part of your money that will not become part of the brokers “book.”) Your investments need to make sense in your whole picture. For instance, if a lot of your wealth is already tied up in a risky business venture, then maybe your financial planner may want to look at putting your investments in more secure vehicles and maybe there should be some discussions about asset protection if the risks inherent in your business are overly expensive or difficult to insure.

Additionally, you should be aware that many account opening documents only have room for one primary investment objective.

A broker should appreciate that different parts of your financial picture have different goals. Consider the following statements and how they might affect all or part of your picture and why having a single investment objective is not appropriate:

1. I’ve sold my house and will be buying a new one soon. Here’s the money from my closing.
2. I’ve heard some good things about this small company and I’d like to take a risk with a small portion of my money.
3. I’ve never done any investing before. I feel very comfortable with CDs and would not want to be risky with this money.
4. I am just a few years from retirement. I don’t need to be rich. I just don’t want to be poor.
5. I have young children who may need to go to college someday, and I worry about inflation in tuition costs.

Each of these scenarios presents different goals. Some of these involve different risks and time frames. So ask...

1. How are you paid? If my portfolio is going to be fairly stable without real need to implement changes, do I need to have a fee based upon the amount in my account?
2. If you are recommending mutual funds, can I switch among the funds in a family without penalty? How do the charges work on the types of mutual funds you are recommending?
3. People choosing professionals may consider getting referrals. However in the case a an investment professional, there are confidentiality considerations that may prevent his providing you with the information about a client. Additionally. What is the likelihood that the broker will give you the name of someone who was dissatisfied with the broker’s performance or services? There are public data bases that may help you out, because the broker may not want to tell you ...

V. HAVE A HISTORY OF CUSTOMER COMPLAINTS, REGULATORY INVESTIGATIONS AND EVEN LAWSUITS.

Anyone in a service industry that is tied to the performance of a somewhat unpredictable marketplace is going to have an unhappy client from time to time. As Abraham Lincoln said, “You can’t please all the people all the time.” Nevertheless, in no other industry is the resolution of problems as secretive as in the securities industry.

When a prospective client comes into my office, one of the first things I do is to order a copy of the broker’s “CRD.” This is a document that is supposed to reflect my regulatory history, lawsuits and customer complaints. It is easily available. If you have access to a computer, you can order a CRD on a broker on the NASD website. If you contact my firm, we would be glad to walk you through his process. It can be e-mailed to you in a matter of minutes, but even if it shows no negative history, that may not be a true indicator.

The CRD operates on an honor system. You may not be able to rely upon it or a number of reasons. You may be familiar (sometimes painfully so) of the credit reporting system created by the financial industry. Imagine if that system required a borrower (rather than a creditor) to “on his honor” to report any delinquent payment. How easy would it be to “forget” to report a delayed payment, repossession or foreclosure? What bank or credit union would ever rely on such a system? Nevertheless, that is what the securities industry is asking you to do.

Technically, most written customer complaints concerning improper sales practices are supposed to be reported on the broker’s CRD. In the less supervised firms, it would be easy for the broker to mollify the customer andexplain to himself or his manager, “Oh, that wasn’t really a complaint. It was just a misunderstanding.” Hence, no report is required.

You may think, “Well if it rises to the level of a lawsuit, isn’t it public record?” The answer is no. Here’s an outline of why:

1. In the mid 80's, the U.S. Supreme Court decreed that arbitration clauses were enforceable. Since that time, virtually all broker dealers have placed such a clause in their account opening agreements. That means that customers waive their constitutional right to a public jury trial and all disputes must be resolved before arbitration panels run primarily by the National Association of Securities Dealers (NASD) or the New York Stock Exchange (NYSE).
2. Arbitrations are private and neither the NASD nor the NYSE has a method of filing every arbitration with the CRD system. Even when it’s a lawsuit, it is still a self-reporting system!
3. Even if the arbitration papers are filled with accusations against the individual brokers, if that individual broker is not named as a party, there is not duty to report it on that individual’s report.. Consequently, the actions of the broker can result in an arbitration panel awarding millions of dollars to a customer because of the wrongdoing of a broker. If he or she is not a party, you guessed it, no report.

But why, you ask, would a lawyer not sue an individual and his employer? There are a number of reasons, but the main reason I don’t do it is because I don’t want the arbitrators awarding damages against that individual and not the brokerage firm. In an ironic perversion of justice, the worse the broker is and the more effective he is at hiding his wrongdoing, a panel may actually feel sorry for the employer. You see, one of the panel members must be a member of the industry who in the back of his mind may be thinking, “Would I have caught this clever, rogue broker?” Sometimes, arbitrators just don’t seem to get it ... “When their representative’s lips are moving, the broker dealer is speaking.” Unless they are worried about putting the broker dealer out of business, lawyers representing investors often do not name the individual broker, so no report is filed.

How do you combat this hidden agenda?

1. May I have a copy of your CRD (or in the case of investment advisors, the ADV) and please explain any entries on it?
2. Read the information. Ask the broker about job changes. If he has moved around every few years, be very observant of the answers given.
3. Plan a phone call to your state regulator and ask about the broker.

You may get the impression that a lot of cases are filed with arbitration, but that is not true. In the entire country, less than 10,000 cases are filed each year. I like to believe that it is because most brokers are honest and work hard for their clients. However, the simple fact is that finding a lawyer to address these types of problems is not easy. Plus, if the problem is not worth more than $100,000.00, that difficulty is multiplied tenfold. So, you need to find out more about the broker and the company he works for because the broker won’t tell you.

VI. THE FIRM I WORK FOR IS ONE BIG CLAIM AWAY FROM CLOSING ITS DOOR AND I HAVE NO INSURANCE TO COVER MOST OF THE WRONGDOING I COULD DO TO YOU.

A licensed broker must be associated with a company called a “broker dealer.” There are many small broker dealers that are barely on the edge of being solvent. One big arbitration award, and they just close up shop and move on to another firm.

You may ask, but I see language on my statement that says there are millions of dollars of insurance protection provided by the Securities Investor Protection Corporation (SIPC). Frankly, for most investor claims, SIPC is a joke! It is designed to protect the investor if money or securities are stolen from the account, not when you’ve been given unsuitable, negligent or even fraudulent recommendations.

There is also private insurance available to registered representatives, but sometimes, their policies are chock full of exclusions for certain types of wrongdoing. If an insurance policy is in force and you are in litigation, your lawyer should try to get a copy of the policy and write your lawsuit so that the claim falls inside the “covered events” of the policy.

So don’t be shy. Remember that the retirement nest egg that took you thirty years to build can shrink dramatically if you get bad advice! Step up and ask:

1. Please identify the broker dealer with whom you are associated. Tell me about them, too.
2. Are you with a broker dealer that is big enough to self insure on any claims? Are you required to carry liability insurance? If so, how much?

These questions can be tough to ask, especially if your broker is a friend from your religious organization or civic club. If your broker is overly offended by these questions, maybe he doesn’t understand how hard you worked to save the money you are entrusting to him. If you are in the process of interviewing brokers, then I would suggest you interview at least three before finalizing your selection.

Remember, your broker has a duty to learn about you. What’s wrong with you doing likewise? If you are like most investors, you will rely heavily on your broker’s advice. His word must be trustworthy, which leads us to our next item...

VII. THE FINANCIAL INDUSTRY IS MOSTLY BASED UPON VERBAL DISCUSSIONS AND WHATEVER PAPERWORK I GIVE YOU MAY BE THE MINIMUM REQUIRED BY LAW OR WRITTEN TO PROTECT THE BROKER DEALER.

It is incredible to consider how much money is invested with so little paperwork. Given a quality financial advisor, this need not be a problem. If the broker is going to be making recommendations about your money, it should not be a problem for you to ask for a written plan encompassing your entire financial picture.

When you meet with your planner, bring information about your budget, your tax picture, and your goals for the future. Your advisor should be a member of a team that will include your lawyer, your accountant, an insurance professional and, if appropriate, a business advisor.

You should be careful about a financial planner that tries to wear too many hats. Having different advisors from various disciplines provides “checks and balances.”

For the past 20 years, my practice has been involved in protecting and reclaiming investor’s wealth. I hope that by following these suggestions, you will never have need of my services as a securities arbitration attorney and that if you do, your chances of success will be greatly enhanced

Jeffrey P. Coleman, Pres.
Coleman Law Firm tel: 727-461-7474
581 S. Duncan Ave.
Clearwater, FL 33756 fax:727-461 7476
Jeff@Colemanlaw.com
website: www.Colemanlaw.com toll free: 866-461-7474