One of the biggest mistakes we have witnessed over the years is when unsuspecting individuals entrust their life savings over to stock brokers and brokerage firms who, at the very moment this new account is receive, have an extensive history of regulatory problems and customer complaints. The brokerage industry is very tolerant and as surprising as it may be to you, it is not uncommon for brokers and their firms to have paid out large (sometimes six figures or higher) settlements for customer related complaints over the years preceding the day you are getting ready to entrust them with your life savings.
Presently there is no requirement for these details to be provided to you, unless you ask or unless you obtain them yourself, which you may easily do.
The second most easily avoided problem is the small local firm that has little or no capital to which an aggrieved investor may look to for compensation in the event there is a problem. The industry allows broker dealers to operate with minimal capital requirements and they are not required to maintain insurance to cover customer losses. This means that even if you have a strong case and can show liability you may not be able to recover your losses since the company may not have the ability to pay.
See my discussion regarding how to research the regulatory history of a stockbroker and a brokerage firm as well as how to review the financial statements of a brokerage firm here.
How to protect yourself and your loved ones?
Check the regulatory background of the broker and the brokerage firm
-it costs nothing and can save you everything.
FINRA requires that each broker maintain records, available to the public, that disclose the employment, disciplinary and customer complaint history of that broker as well as the brokerage firm. While we are happy to obtain these records for you upon your request, you are free to obtain the report on any broker (called a CRD) by visiting the BrokerCheck section of the FINRA website.
This is the first step we take at the office in looking at any case. Many times we have had clients tell us that they never would have entrusted the subject broker with their life savings had they been aware of the prior problems disclosed on the CRD.
It goes without saying that if you look at the CRD report for the broker you are thinking of hiring, and it reveals a multitude of customer complaints for many years and if the firm has paid out hundreds of thousands of dollars settling these claims and/or the broker has been fired a number of times for violating firm policy and/or the broker has filed personal bankruptcy one or more times over the years, you might reconsider whether you should give him your life savings.
Yes, we have seen all of that on a single broker’s CRD.
With regard to the financial capability of the brokerage firm, your safest path is to deal with one of the many well-known large national or regional firms. This will help you avoid 95% of the problem. If you are tempted to hand over all or a part of your fortune to one of the many local unknown firms then your only protection is to obtain a copy of the annual financials which the firm is required to file with the SEC. This is of limited benefit since the financials are not always timely. You can also ask the broker to provide you with details regarding any insurance coverage they may have for customer losses, since a small percentage of the smaller firms do maintain some coverage.
HOW TO ACCESS FINANCIAL STATEMENTS OF A BROKERAGE FIRM AND HOW TO RESEARCH THE REGULATORY HISTORY OF A BROKER AND/OR A BROKERAGE FIRM
There are over 5,000 registered broker-dealers in the United States. These firms range from the largest and most well known wirehouses, to large regional firms, down to the local broker-dealer that may have only one office.
It is quite possible that the firm or broker you are considering dealing with may have prior regulatory problems and/or prior customer complaints. Before you hand over your nest egg that you may have spent a lifetime accumulating, we suggest that you do two things:
- Go the the Edgar website of the Securities & Exchange Commission and take a look at the most recent financial statement for the company you intend to do business with. If it is one of the big well known national firms, you can probably skip this step since they likely have adequate financial resources to cover any typical broker negligence or fraud. If however it is a regional firm or small local firm, you should definitely take a look at the financials to see if they have the wherewithal to cover investor claims should one of their brokers negligently handle customer accounts or in the case of stockbroker fraud. Input the name of the company you are considering trusting with your retirement funds on the SEC Edgar website. On the results page, look for the most recent X-17A-5 filing and take a look at the amount of shareholder equity on the balance sheet. Since many firms do not carry insurance for broker negligence and fraud, the amount of shareholder equity may be the limit of that firm’s ability to cover customer losses.
- Next you should visit the FINRA BrokerCheck website and input the name of broker who will be handling your account. After confirming that you have the correct broker (look at the name of the firm he works for to be sure), follow the link to the Detailed Report and review it to see if there are any disclosure items, which may include disciplinary matters, terminations or customer complaints and arbitrations. Use this information, coupled with your assessment of the broker’s integrity and the recommendations of trusted friends, to make your decision.
- You can obtain a similar report from FINRA on the company by performing another search on the FINRA BrokerCheck website.
If you prefer, we are happy to obtain these reports for you at no charge.
Call 561-391-1900, and speak with Mr. Rex or his secretary Nan Thompson.
We do not charge for your initial consultation to determine if we can help you.
A WORD TO THE WISE ABOUT SMALL LOCAL FIRMS-MOST ARE NOT INSURED
There is no regulatory requirement that brokerage firms carry insurance to cover losses for the inappropriate, negligent or fraudulent advice that may have resulted in the accounts you or your loved ones.
In September 2014, after studying the matter for a year, FINRA decided that it could not compel brokerage firms to carry insurance to cover awards and verdicts customers might obtain against them and their brokers for fraud and/or negligence in the handling of customer accounts. This means that if your account is at a firm with limited net capital (many have less than $100,000 in net capital) and the broker makes a mistake, or worse yet, commits fraud and your nest egg suffers, your case may put them out of business. Unfortunately, if they are forced to file bankruptcy because the $250,000 loss they have been ordered to pay exceeds their $75,000 net capital, that does not get any money back to you.
Often times these losses, when suffered by the elderly who are living on fixed income, are devastating to the individual as well as the family, who now must figure out how to pay the health costs and living expenses with what now remains of the nest egg.
We routinely see cases where proving that the broker and the firm are liable for the losses is not really the issue, since often times the abuse is so flagrant. The problem is that the broker and firm may have very limited ability to pay damages. Unless the firm has insurance, which is not common, there is little that can be done to recover these losses.
Dealing with larger firms eliminates much, if not all of the risk associated with ability to pay.
If you have questions about the way your brokerage account has been handled or are in the process of investigating a new broker or brokerage firm you contemplated doing business with, give us a call at 561-391-1900 and we will be happy to help.