Investors And Their Investments - Be Careful What You Say

Question: As an investor, are there certain things I should look for (and look out for) when investing or going to a broker? As an arbitrator and mediator for the National Association of Securities Dealers (NASD) I have found that investors must begin to protect themselves before they purchase any investments. This begins when you open an account and fill out the client account form. This is your personal and business information. The one thing I can guarantee is that in case of a dispute this information will either strengthen or weaken your position in the dispute.

Usually a problem can arise months or sometimes years later when you realize that you were sold an investment that you were unsuited for, or an investment about which you did not understand the risks involved.

If this happens to you, and you and the brokerage firm cannot come to an amicable solution, then arbitration could be your legal remedy. The arbitration may take place years after the original conversation between you and your financial advisor regarding the investment you purchased. I can almost guarantee you that the financial advisor will remember the conversation differently than you do, thereby making the verbal discussions unreliable and meaningless. That is why the client account form, usually the only written document the financial advisor has that describes you, becomes so vital in your defense.

The client account form might look like a basic questionnaire with simple questions, but it is the document that shows if you are suited for certain types of investments. Do not answer these questions lightly or inaccurately. It could cost you dearly in the future

Before you begin to fill out the account form I want to emphasize the best advice I can give you. DON'T EXAGGERATE YOUR INVESTMENT EXPERIENCE OR INCOME. Remember, just because you are knowledgeable and successful in your professional field it does not mean you have the same knowledge in investments.
When the question is about your investment experience in stocks, bonds, mutual finds, private placements, commodities, etc., only put the actual number of years you have been an investor. If you are trying to impress the financial advisor, don't.

Here are three typical questions on the account form that you should be aware of and how they may be interpreted by the advisor:

1-Residence - rent or own. This shows the brokerage firm that if you own a home, you are not ignorant of all types of investments. Also, if you own a real estate limited partnership, REIT, or a pool of sub prime mortgages you would have some idea of the liquidity and economic risks involved. Thus, if these investments have decreased in value, you could not claim that you were unaware of the risks in real estate.

2-Client state annual income. Client state net worth exclusive of family residence, and estimated liquid net worth - DO NOT EXAGGERATE. This shows the brokerage firm what portion of your assets is in a specific investment. Having a diversified portfolio of no more than 2-5% of total assets in one investment may not be worth as much in an arbitration decision as 50% in one investment.

3-Is the client an officer, director or 10% stockholder in any corporation

This tells the brokerage firm that you probably have knowledge about business and investments and also that you have additional assets.

It is important to have a good professional relationship with the financial professional who will help you attain your retirement goals. Just remember if your investments fail, everything you either said or wrote in the past will either help you or hurt you in the future.