From Your Perspective: Investor protections Investor protections The vast majority of investors enjoy good working relationships with their brokers, who are sometimes called financial consultants (FCs) or financial advisers (FAs), depending on the firm where they work. But difficulties do occasionally occur — ranging from minor problems, such as mistakes on your brokerage statement or investor profile, to more serious problems, such as concerns about inappropriate advice or even fraud.

To protect yourself and your accounts, you should know: As in most things, active prevention is the best approach. And for those problems that you can’t prevent, there are regulations and processes in place to help you achieve a fair resolution.
All in a name
You may hear brokers referred to as registered representatives (RR). The terms are actually synonymous and interchangeable. All brokers are registered reps, and all registered reps are brokers. They’re licensed to buy and sell investments for clients, and for themselves or their firms. Registered investment advisers (RIA), on the other hand, are regulated under the Investment Adviser Act of 1940. They provide advice and money management but aren’t licensed to buy and sell investments. Some people are both RRs and RIAs.
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Choosing a broker When you choose to work with a broker, you're placing your trust — and your money — with that person and his or her firm. So doing your research in the very beginning can help you avoid potential problems later on.

Check the records

It’s important to find out whether the broker you’re considering is properly licensed, which is required by state and federal regulators. There are strict qualifications for licensing, including a professional background check and a passing grade on a securities exam administered by the Financial Industry Regulatory Authority (FINRA). And licensed brokers are required to disclose important information about their business — such as disciplinary actions taken against them.

In addition, if you do business with an unlicensed broker, regulators may be less able to help you if things go wrong.

Lifetime learning FINRA rules require that all brokers take continuing education (CE) courses. Those rules also require every firm — whether large or small — to establish a training program for its brokers.
A word to the wise
Keep in mind that running a background check on a broker is only one of several steps in choosing the right professional to work with. You’ll also want to ask for references and interview the candidate. And most experts agree that the best way to begin your search is by asking for recommendations from your other professional advisers, and friends and family who are investors themselves.
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Checking out brokers When evaluating a potential broker, the first thing to do is check the Central Registration Depository (CRD) through your state securities office or the Financial Industry Regulatory Authority (FINRA). This public database contains records on almost all practicing brokers and brokerage firms, and can tell you whether the broker or firm you’re evaluating is properly licensed to sell securities. You can also check the broker’s employment history and see if there are any regulatory actions, arbitrations, or serious investor complaints against the broker or firm.

You can request a free report through the FINRA BrokerCheck Web site (brokercheck.finra.org) or by calling the toll-free BrokerCheck hotline at 800-289-9999. You can ask to receive the report by email, regular mail, or over the phone — although email requests will usually be processed fastest.

You can also request a report through your state securities regulator, who may be able to provide you with additional information on brokers licensed by the state. A complete listing of state securities regulators and how to contact them is available at the North American Securities Administrators Association Web site, www.nasaa.org.
Helpful hints
Along with checking your broker’s licensing and history, you should check whether your brokerage firm is a member of the Securities Investor Protection Corporation (SIPC). This organization offers some protection if the firm holding your investments goes out of business. However, it won’t protect you from losing money if the value of your investments drops.
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Choosing an adviser Investment advisers, who may or may not be licensed as brokers, are paid for the advice they give. As advisers, they’re required to register — with the state securities office if they manage less than $25 million in assets, or with the SEC if they manage more than that amount. Those who register with the SEC have the RIA designation.

Form ADV

The vital document you need to review when choosing an investment adviser is called a Form ADV. The document comes in two parts. The first describes the adviser’s education, type of business, and whether regulators have taken any disciplinary actions against the adviser. The second is the adviser’s brochure, which describes his or her services, fees, and strategies. The form is generally timely, because if registered advisers don’t keep it up to date, they risk having their registration revoked. You can obtain a copy from either the state securities office, directly from the adviser, or, for a small fee, from the SEC, depending on the size of the adviser’s business. You can also obtain a copy of some Form ADVs through the Investment Adviser Public Disclosure Web site at www.adviserinfo.sec.gov.
Helpful hints
Some other professionals have financial planning credentials and may advise you on investment decisions and refer you to a broker who can execute your trading instructions. If the person is a lawyer or an accountant, you can run a background check with the state bar or the state accountancy board respectively. You can find lists of certified planners from the Institute of Certified Financial Planners and The American College. You can also consult the National Association of Personal Financial Advisors about fee-only planners.

FINRA has a database that provides information on many professional designations. This database includes links that let you verify if a person actually holds the designation. You can access it by visiting www.finra.org and entering “professional designations” in the search field.

You may also want to get in touch with the Better Business Bureau (www.bbb.org) to make sure there are no consumer complaints on record against the person.
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Professional responsibilities You have the right to expect that people who provide investment information and advice will be honest and fair. That standard includes: Advising you about the obligations and restrictions associated with an investment, such as whether an investment is illiquid, or whether you might have to make additional contributions in the future

Making recommendations that suit your financial situation, age, goals, and risk tolerance

Providing accurate records of the status and value of your account, including any charges or fees assessed

Clear communication tends to produce the best results — and prevent misunderstandings down the road. For example, you’ll want to be candid and specific about your goals and financial assets. You should also say if you’re anticipating major changes that could affect your situation, such as marriage, divorce, a new baby, or likely inheritances.

It’s also important to be honest about your comfort level with investment risk. If there’s anything you don’t understand about an investment, never hesitate to ask questions and always insist on clear explanations. It’s critical that any recommendations you’re asked to act on make sense to you. And you’ll want to clear up any misconceptions — for instance, about your financial goals or your risk tolerance — as quickly as possible.
Helpful hints
After a meeting or phone conversation with your broker, it’s a good idea to ask for a summary in writing to make sure you’re in agreement and to help you keep track of what you’ve discussed. If the letter reflects what you’ve said, you should sign and return it, keeping a copy for your records. If the letter is vague or leaves things out, ask for a more detailed revised statement.
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Keeping detailed records Keeping detailed records of all conversations, decisions, and documents will help you keep track of your relationship with your broker and back up your case in the event anything goes wrong.

It’s a good idea to keep a log of all conversations, noting what you’ve discussed. You might even want to send an email or note confirming what was said and any decisions made or instructions given, and keep copies of it. You should keep these notes as you go along, since they’ll be more credible and more accurate that way than if you simply tried to recall conversations after the fact.

If your broker sends clippings, research reports, or other investment information, review them thoroughly before filing them away for safekeeping. And whenever you get your statement or confirmations of transactions, it’s important to read them carefully. The faster you catch a mistake, the easier it tends to be to correct.
Warnign signs
Be wary of any broker who: Page 6 of 12




Problems with your brokerage account If you spot a mistake when you’re reading your statements and transaction confirmations, what do you do? Chances are it’s an honest mistake — for instance, your broker might have bought a different stock than the one you intended. Or money could have been incorrectly transferred between mutual funds.

The first thing you should do is contact your broker right away and let him or her know what you’ve found. That may be enough to resolve the situation, especially if it was a misunderstanding. It’s always smart, though, to keep a log of your conversations and write a letter confirming your call.

If the problem isn’t settled promptly, you should write to your broker’s manager. Explain exactly what went wrong and how you would like it corrected. If you’re not satisfied with the response, you can contact the company’s compliance department.

If you think other investors are at risk, you should contact your state securities office, or the Financial Industry Regulatory Authority (FINRA). As a general rule, the more money that’s at stake, the higher you may have to go to reach a solution.

If you’ve lost money, FINRA advises you to consider arbitration. There’s no guarantee that you’ll get your money back, but it makes the issue a matter of record and may result in disciplinary action against the broker or firm. You can learn more about what to do if problems arise at the FINRA Web site, www.finra.org.
A word to the wise
Always check your account statements to see if your trades were made for the right securities in the right amounts, at the times you expected. You should also look for fees you don’t understand or transactions you didn’t authorize. If there’s anything you don’t recognize, you should make sure to follow up. Page 7 of 12




Suitability Suitability means that investment products are appropriate for you in terms of your individual goals, finances, time horizon, and risk tolerance. Occasionally investors complain that they’ve been urged to make unsuitable investments — or buy investments that don’t really help them achieve their investment goals.

For example, if you were about to retire and a broker recommended you put the bulk of your retirement money into small company stock, this may be an inappropriate recommendation depending on your particular situation. Or if you had a low tolerance for investment risk and your broker recommended a high-yield bond fund, it might be unsuitable.

Brokers may make unsuitable recommendations because of a misunderstanding about the client’s financial situation or risk tolerance. Other times, he or she may recommend an investment that is not in the best interest of the client. You can usually avoid these situations by paying careful attention to detail, doing some independent research, and being willing to ask hard questions.
Getting started
  1. Before you invest any money, make sure you understand how the investment works and what it’s designed to achieve for your portfolio.
  2. Review any information your broker sends you about an investment. In particular, read the mutual fund or variable annuity prospectus, which details risks, fees, and how the investment works.
  3. Before buying anything, ask your broker about the commissions he or she will make on your transaction.
 Warning signs
It’s smart to review periodically what the firm has on file regarding your account to make sure it’s accurate, including your client profile and account agreements. You should update the information if your situation changes. If you have to pursue a complaint against the broker with the firm’s compliance department or securities regulators, they will use this documentation to verify your claim. Page 8 of 12




Churning Some experts estimate that investors lose billions of dollars a year to churning, or excessive trading in their securities accounts. Because some brokers make money based on the number of trades they make, they may be tempted to churn a client’s account to generate higher commissions.

For example, if a broker moves money quickly in and out of similar securities or frequently recommends replacing one product with another similar product, there may be reason to suspect churning. Another indication may be that you are paying more in commissions than you are earning on your investments.

What the regulators say

Churning is illegal but it is often hard to prove. Both FINRA and the SEC define churning as unauthorized trading in a discretionary account — or an account in which the broker is authorized to trade without the prior approval of the client. In these cases, regulators will look at the turnover rate and the ratio of commissions paid to the account’s rate of return to determine whether the account is being churned.

Regardless of the type of account you hold, if you have reason to suspect that your broker is not acting in your best interests, make sure you understand the reasoning behind his or her recommendations or decisions. If you’re not satisfied with the answers, it may be time to take your business elsewhere.
A word to wise
Churning in your securities account not only generates high commissions: It may also generate high taxes. When your broker quickly turns over stocks in your account, it may create short-term capital gains, which are taxed at your income tax rate rather than the lower long-term capital gains rate for stocks held more than a year.
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Resolving problems with a broker When things do go wrong between you and your broker, what do you do? Your first step is to try to resolve things directly with the broker and his or her firm. Most problems are solved this way. But if that doesn’t work, you may be able to find a solution through mediation or binding arbitration.

The Financial Industry Regulatory Authority (FINRA) recommends first trying to resolve the dispute through mediation — an informal and non-binding process in which a neutral mediator leads discussions with you and the other party to craft a solution that works for both sides. This process is much more likely to preserve relationships, and it costs less than arbitration. But remember that both parties must agree to take this step.

In contrast, arbitration is a formal process, in which experienced, neutral, third-party arbitrators review your case, determine the outcome, and set the amount of any award. Unlike mediation, the outcome of arbitration is binding, so both parties must abide by the arbitrators’ decision.
Arbitration/mediation clinics
If your claim is small or you can’t afford to hire a lawyer, you may qualify for legal representation through a legal clinic specializing in arbitration and mediation. The clinics are run by law schools in California, New York, and Pennsylvania — although investors who live outside those states may be able to receive more limited assistance, such as general advice about their claims or how to file a complaint. For contact information and to learn more about the program, visit the SEC Web site: http://www.sec.gov/answers/arbclin.htm
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Investment fraud If you do thorough research before choosing the financial professionals you work with and the products you invest in, chances are you can avoid becoming a victim of investment fraud. But even experienced investors can occasionally be taken in by persuasive scams. The Internet has made it especially easy for skilled con artists to mine investors’ personal information and target individuals based on their investing habits or their religious or cultural affiliations. Online bulletin boards, spam, chat groups, newsletters, and email enable fraudsters to spread false information cheaply and easily with little risk of detection.

Investment con artists make their living by convincing investors to put their money into high-risk, worthless, or even imaginary securities. They operate by winning over investors’ trust and feeding them misleading information. While investment fraud comes in many guises, here are some warning signs:
Warning signs
Just because someone from your religious or ethnic community approaches you with an investment opportunity doesn’t necessarily mean it’s legitimate. Many con artists use religious and cultural affiliations to gain the trust of unsuspecting victims. Be sure to check out any investment with a trusted financial professional. You’ll want to check the background of the person or firm offering the product with your state securities regulator or FINRA.
A word to the wise
You can’t spot a fraud by the quality of the presentation. Con artists are usually well dressed and use professional-sounding language. Their promotional materials are often slick and well designed to give their frauds the appearance of the real thing.
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If you're a victim of fraud Prevention is by far your best defense when it comes to securities fraud. But if it does happen to you, it’s important to report the crime to regulatory agencies and other authorities. While it’s unlikely that you’ll be able to recover your money if you’ve been defrauded, you may be able to help authorities identify the perpetrators and prevent other investors from being victimized in the future.
From the expert
If you suspect you are the victim of investment fraud, file a report with the following organizations:
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