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

 

The Problem

 

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)

 

The Problem

 

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.

 


 

Unsuitability

 

The Problem

 

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

 

The Problem

 

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 activity in your account.

 

How Problem Is Detected

 

  • In most cases, unauthorized trading is discovered through reading confirmations and regular account statements. This may occur when the customer receives a confirmation in the mail for an unknown trade. In many instances, these transactions involve existing assets in the account and do not require client payment. In some cases, an existing asset may be liquidated to fund the purchase of a new security.

 

How to Avoid This Problem

 

  • Always repeat instructions to your broker to promote a clear mutual understanding of the transaction.
     
  •  Document (keep notes) all conversations with brokers.
     
  • Thoroughly read and retain, in a timely fashion, your monthly account statements, confirmations and any other information you receive about your investment transactions.
     
  • Take immediate action if you see a transaction you do not recognize. Time is critical. Reconcile any discrepancies at once. 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. The longer the lag time, the less substance and credibility your argument has.
     

 

Investors' Responsibilities

 

Before you make an investment, be prepared, do your homework and don't be caught off-guard. Investigate thoroughly any potential investment before you make it, as well as the broker and securities firm that are recommending it to you. Research all materials available to you, such as a prospectus, annual report and other offering information. Get to know the firm and the individual you are dealing with. Beware of exaggerated claims and high-pressure tactics. Become better informed about investing by attending classes, seminars or checking the business reference section of your public library.

 

If you choose to rely solely on a broker, make sure the firm has correct information regarding your financial situation and investment objectives and that the firm and broker fully understand your limits on risk.

 

And, if you believe you have been wronged, act quickly. It is your responsibility as an investor to seek redress for any loss. Immediately question any transaction or entry that you do not understand or did not authorize with your broker. Keep good records—the better records you retain, the more successful you will be in resolving your claim. 


Organize your records logically so they provide a chronology of events. Following are a list of documents that could be useful in pursuing a potential problem:

  • account statements
  • confirmations of transactions
  • notes of discussions with your broker
  • copies of correspondence
  • written material (e.g., prospectus or offering materials) provided to you by the broker
  • any research material you may have received from the broker

 

Don't be timid or ashamed to complain. The securities industry needs your help so it can operate successfully.

 

Note: Investor Information includes other tools and information about investor protection and education.  

 


 

Investors' Recourse

 

If you believe you have been subjected to unfair or improper business conduct by a securities professional, FINRA encourages you to voice your concerns. Your first course of action should be to report the matter to your brokerage firm's management and contact the firm's compliance department to discuss any concerns about the broker's conduct. However, if you, your broker and the firm cannot resolve the matter, there are effective alternative dispute resolution mechanisms available to you, including mediation and arbitration. FINRA has full-fledged Mediation and Arbitration Programs in place for investors.

 

Note: Investor Information has useful information for the purposes of investor protection and education. You may also find Arbitration and Mediation information, including descriptions of the mediation and arbitration process.

 


 

Investor Complaint Center

 

FINRA, with the help of investors, has been successful in disciplining brokers and firms that have violated securities rules and regulations. If you believe that you have been defrauded or subjected to improper business practices by a broker/dealer, brokerage firm or other industry professional, you may choose to file an investor complaint through FINRA's Investor Complaint Center.

 

 


 

Regulators' Role

 

The role of FINRA is to enforce the rules of NASD and investigate for violations. It is very important for you to understand that FINRA staff is investigating your complaint from a regulatory perspective only and there can be no assurances that formal charges will be filed against your broker. Nor do FINRA investigations necessarily result in the return of customers' money, even where formal disciplinary actions are taken and sanctions imposed. While the involvement of a regulator in investigating your complaint may have some effect in its resolution, it is the responsibility of the investor to initiate any formal process to recoup potential losses. Do not wait for a regulator to complete its investigation to initiate a formal process, if you deem pursuit of other avenues of redress as an appropriate action.

 

The fact that your investment has decreased in value or you that you may have lost money does not in itself  mean that your firm or broker has engaged in misconduct. Investments in most securities involve risks. Remember, there is no guarantee that investments will always be profitable, and there is no fund to compensate customers for losses they may have suffered as a result of a particular investment.

 


 

Investor Information

 

Following is a list of various investor resources that you may find of help as you embark on your role as a market participant. These are divided into three categories—information about investing in general, communications about investor protection and sources to obtain profiles and conduct research about specific companies.

 

Before you invest, make sure you do your homework. These are just a few resources to get you started.

 

Investor Protection

SourceFeesDescription
FINRAFreeInvestor protection information
FINRAFreeOnline Brokerage Advertising
SECFreeInvestor protection and education, contacting SEC
NASAAFreeInvestor protection and fraud information
Investor Protection TrustFreeInvestment protection and education information
AAIIFree, but requires registration for some informationEducation and protection information

 


 

Investing

 

SourceFeesDescription
MS InvestorBasic service: FreeFinancial data
QuickenFreeInvesting information
MorningstarFreeInvesting information, mostly mutual funds
MorningstarFree (for a limited time)Reports and research
Yahoo FinanceFreeFinancial news and data
Yahoo FinanceFreeFinancial news and IPO information
AAIIFree, but requires registration for some informationInvesting information
Wall Street JournalMost features require fee

Investment news and analysis

 

 


 

Company Profiles and Research

 

SourceFeesDescription
EDGARFreeCompany financial filings
BloombergFree, some research requires subscription feeFinancial data, analysis and research
Hoover'sFreeCompany and industry profiles, IPO information
Moody'sFree for recent information; fee-based for custom reportsRatings reports and research
Standard and Poor'sFree based on research and reports requestedFinancial databases
Standard and Poor'sFree based on research and reports requestedCompany ratings
Wall Street JournalMost features require feeData and analysis