The news is full of stories about brokers and financial advisers involved in everything from questionable practices to outright thievery. And no investor is immune. Even highly successful business owners have fallen prey to slick schemes offered by modern-day snake oil salesmen.
“Some of that is out and out greed on the part of the people,” says Mike Elliott, associate attorney with Stark & Knoll. “There’s a very fine line between being willingly naive and being naive. You have to be educated. At the same time, you want to place trust in people. The industry as a whole has done a good job advertising the need for people to watch your money. These things are sophisticated investments (for) which you need the advice of an expert.
“Trying to do it on your own is sometimes difficult, if not impossible. It’s almost like a second job to invest your money and figure out what the best options are. That can get difficult fast, so you typically turn to somebody you’re placing your trust and your livelihood in. That explains why a lot of people get taken advantage of, even people we think of as quite sophisticated.”
Investors can investigate financial advisers and brokers through the National Association of Securities Dealers. The self-regulated organization oversees the investment community and provides service through its Web site, www.nasd.com.
“You can put the name of any broker in, and they’ll give you the background of that individual and whether or not there’s been any prior complaints, and other information that might indicate that there is a problem with the broker and the way in which they conduct themselves,” Elliott says.
From there, he says, it’s the investor’s job to stay involved.
“Do you notice transactions occurring within your account, such as the purchase or sale of stocks, mutual funds, bonds or other investments, without your prior permission or approval?” he says. “This is an example of unauthorized trading. While some brokers and advisers are given discretion over a client’s account, this is rare. Most accounts are nondiscretionary, meaning that if a broker or adviser wishes to make the trade, he or she must first get the permission of the client.”
If the investment seems too good to be true, it probably is. Advertisements offering guaranteed returns two or three times that of bank CD rates or similar opportunities are potentially scams – the greater the potential reward, the greater the risk.
Another factor to consider is the motivation fueling an expert’s advice.
“A lot of these advisers and brokers make their living off of fees or commissions,” Elliott says. “It is pretty good advice to try to seek out somebody who makes a living by giving advice — charging an hourly rate or something like that. You have to really be mindful of the fact they’re trying to earn a living as well. If you’ve got somebody who is overly aggressive about selling different things, that should be a warning to suggest (that) perhaps they’re trying to generate fees.”
If you’ve done your due diligence and monitored your accounts, and a problem still arises, there is little recourse.
“The downside is you’re going to be subject to a process called arbitration,” Elliott says. “It’s a more complicated process; it’s a more expensive process (than pursuing a private action). It often acts as a deterrent in these types of cases unless the loss is great enough to justify the type of investment.
“I have yet to see an agreement that hasn’t been subject to arbitration.”
HOW TO REACH: Stark & Knoll, (330) 376-3300 or www.stark-knoll.com
