Investors' Best Practices
Common Investor Problems and How to Avoid Them
FINRA operates an Investor Complaint Center that is designed to receive complaints from investors regarding their brokers and/or the firms that employ them. FINRA's role is to investigate these complaints for potential violations of securities laws or regulations. This page discusses some of the most common problems reported by investors in their complaints to FINRA. In providing this information, FINRA is seeking to educate investors on the type of problems frequently reported, how to avoid these problems and what to do about them if encountered.
Listed here are the four most frequently reported problems made by investors filing complaints with us:
- misrepresentation—untrue representations or omissions of material facts relating to the investment.
- cold-calling—unsolicited or unwanted phone calls using high-pressure, persistent tactics.
- unsuitability—an investment made by a broker that is inconsistent with the investor's investing objectives and profile.
- unauthorized trading—sale or purchase of securities without the investor's prior knowledge and authorization.
This page offers advice to help investors operate safely in the securities markets. For example, if you encounter any of the problems listed above or believe that you have been defrauded or treated unfairly by a broker in some other fashion, act immediately. Your first course of action is to contact the firm's branch manager and compliance department.
Arbitration or mediation may be appropriate if you are not satisfied with your broker's response or if the problem cannot be resolved to your satisfaction through the firm. And, in conjunction with arbitration and mediation, you may file a complaint at FINRA's Investor Complaint Center. It is also important to be aware of your responsibilities as investors and the regulator's role in the investor complaint process.
Misrepresentation can occur when a broker purposefully makes untrue representations of material facts or omits material information. This can happen in any security in any account, but this problem is commonly found with low-priced, speculative securities because of their increased risk.
How Problem Is Detected
- Investor loses money on investment.
- Investor has trouble liquidating (selling) investments.
- Investor conducts independent research (e.g., Standard & Poor's (S&P), Annual 10K and/or Quarterly 10Q Reports, Value Line, Wall Street Journal, etc.) and obtains information which contradicts statements made by the broker.
- Upon review of the prospectus, confirmations, account statements or other documents, the investor discovers information that does not coincide with representation made by the broker.
- Investor calls broker to check on status and learns about material information previously unknown.
How To Avoid This Problem
- Ask the broker to send you information that will back up his/her representations.
- If you rely on your broker, make sure the investment meets your objectives; and make sure you understand and are comfortable with the risk, costs and liquidity of the investment. Never invest in a product you don't understand.
- Ideally, you should independently verify information by thoroughly reading a prospectus, research reports, offering materials, annual reports (10K), quarterly reports (10Q), brochures or other documentation.
- Keep contemporaneous notes of your conversations with the broker.
High-Pressure Sales Calls (Cold-Calling)
High-pressure sales calls (sometimes referred to as cold-calling) occur when an investor receives unsolicited or unwanted phone calls—using high-pressure, persistent tactics—soliciting the purchase of securities. This is most frequently found with low-priced, speculative securities.
How Problem Is Detected
- Broker pressures investor to invest quickly to avoid missing out on a "once in a lifetime opportunity", indicates that the offer is "good today only", or makes claims that seem too good to be true.
- Investor receives frequent phone calls. Caller is badgering, insulting or claims to be an expert (has "inside information," etc.)
- Investor is subjected to the three-call system—(1) investor receives an introductory call; (2) broker calls again to touch base and to develop a comfort level with the investor; (3) call is a sales pitch or an enticement to buy.
- Investor may be asked to sell a listed or more well-known security for an obscure, broker-recommended product.
How To Avoid This Problem
If you just want them to stop calling—
- FINRAs Telemarketing Rule (FINRA Rule 3230) limits the calling time to between 8 a.m. and 9 p.m. Brokers calling must identify themselves by providing their name, firm name, address or phone number. If you do not want such calls, ask the caller to place you on the firm's "do-not-call" list.
- Beware of sales pitches that make exaggerated claims about the expected profitability of a particular investment, or make specific price predictions, such as, "your money will double in six months." If it sounds too good to be true, it usually is.
- Never send money to a firm or broker that you are hearing from for the first time simply based on a telephone sales pitch. If you do so, be prepared to accept the risk of losing the entire investment.
- Find out about the broker's or investment adviser's background via FINRA BrokerCheck or by calling the FINRA BrokerCheck Hotline (800) 289-9999. Call the state securities office and Better Business Bureau.
- Meet with your broker and visit the firm, if possible. Investments are major financial undertakings and should be afforded the same degree of investigation and caution as any other major purchase you might make.
- When opening a new account, read the New Account Agreement carefully for all the terms and conditions, especially margin and credit terms. Fully understand what you are agreeing to.
- Ask for and review written material before buying.
- Make sure the broker knows and understands your financial profile and life circumstances.
- Check confirmations and account statements carefully. Look for evidence of unwanted credit or margin use.
- Take immediate action if you detect a problem. Time is critical. Contact the firm's branch manager. And, send a telegram, or registered or overnight letter to the compliance department of the firm refusing the purchase. Also, follow up with a phone call to the firm's compliance department.
Other resources are available on this topic via the Internet, such as the Securities and Exchange Commission's Cold-Calling Web page, and information from FINRA about Telemarketing Rules to protect investors.
A suitability problem can involve any security and occurs when an investment made by a broker is inconsistent with the investor's objectives and investing profile (e.g., age, financial status, long-term goals, income and net worth of the customer). For instance, the broker encourages an investor to purchase an investment that the broker wants vs. an investment that may be best suited to the investor. An example of such an investment would be a recommendation to make a significant investment in a highly speculative security to an investor with a fixed income or the need for monthly income.
How Problem Is Detected
- In the course of reviewing the account, something is noticed which prompts the investor to ask more questions. This could be the inability to liquidate the investment, unexpected commissions, etc.
- Other brokers or securities and tax professionals point out suitability issues.
- Investor researches stocks, bonds, etc. through different sources which reveal that the investment does not fit the customer's investing profile.
- Investor reviews documents, such as offering memorandum, monthly statements or other sales materials which reveal that the investment does not fit the customer's investing profile.
How to Avoid This Problem
- Read and understand the terms of any new account agreement you may be asked to sign with the firm. Make an informed decision before agreeing to allow the broker to use discretion in buying or selling your investments. Also, fully understand how margin and other credit provisions work and the circumstances in which you could be asked to pay additional monies.
- Understand and agree to what is being purchased before the transaction occurs. If you can't explain it, don't buy it.
- Provide the firm with accurate information and don't inflate your net worth, income etc. Be candid about disclosing financial constraints. Doing so would help prevent running into a problem.
- Ask to review what is on file at the firm regarding your account, such as a new account form with client profiles, margin account agreement, options account agreement, discretionary account agreement, etc. You have the right to know what is on file about you, and information must accurately reflect your objectives—age, financial status, long-term goals, income, net worth, etc. These are the documents the brokerage firm's compliance staff uses to monitor broker's activities, and provide an opportunity for the firm to intervene early if any problems arise. If it gets to that point, regulators use this information as well when investigating a complaint.
- Do your homework, review prospectus material and conduct other research.
- Thoroughly read and retain your monthly account statements, confirmations and any other information you receive about your investment transactions.
- Be proactive, ask questions (How is this in line with my investment objectives? What is my risk of losing money on the investment? What has been the past performance of the investment? How liquid is this investment, and what are the costs of liquidating the investment and other barriers to sale?).
- Keep good records of communications with the broker. Contemporaneous notes of your conversations with the broker will help. Also, repeat your sense of the conversation to ensure you both have the same understanding. Be careful not to be the victim of miscommunication. For example, when a broker says "can I put you down for x shares" he really means can I purchase them for you.
- Can you afford to use margin or other credit? If you can, know exactly what to expect and under what conditions you may be required to pay additional funds should the price of the security drop.
Unauthorized trading involves the purchase or sale of securities in a customer's account without the customer's prior knowledge and authorization. This can occur with any security. For example, the broker may believe a transaction is in the investor's best interest but cannot or does not contact the investor, and then makes the trade anyway. Or, the broker attempts to convince the investor of the benefits to the transactions in the hopes that the investor ratifies trades after the fact. Remember, brokers generate commissions through executing transactions (sales or purchases). That is why you should pay close attention to