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As an investor, you have probably been frustrated a time or two with your broker. Problems range from poor customer service, bad order execution, and unreasonable fees. Some of these problems are nuisances—not something that results in significant monetary damage. Other times, however, the problems are serious enough to warrant a response and a formal complaint. The following events might necessitate action on your part: 

Removing funds or securities from an account: Obviously, as an investor, you need to know that the funds in your brokerage account are safe. If you notice on your account statement that some funds or securities are missing, it may call for a formal complaint. Be skeptical if the broker tells you it was a clerical or computer glitch. In this case, demand an explanation from the branch manager or compliance officer in writing and make sure the problem has been corrected in the next account statement. 

Churning: If a sales representative for a broker encourages you to make frequent transactions by purchasing a stock, selling it, and using the proceeds to buy a different stock, there is a possibility that the representative is churning your account. In other words, he or she is generating numerous transactions in your account to increase commission revenue from trading. It is not legal.

Trading ahead of a customer's order: If you have a large order to buy stock and the price of that stock is likely to move higher as a result, the broker cannot use this information to take a position ahead of you and profit from the rising stock price. Front-running customer orders is not allowed.

Poor execution: Under the Securities and Exchange Act, brokers have a "Duty of Best Execution." This simply means that brokers are required to make an effort to obtain the best possible price on customer orders. This is not just related to one or two orders, but consistently poor execution could be a sign of a problem broker.

Charging excessive "Markups": Sometimes a broker acts as "principal" by buying and selling securities to customers from the broker's own account. If an investment security is sold to you as a "principal" transaction, there may be no commissions on the confirmation statement. Instead, the investor pays a "mark-up," which is sometimes two to three times the normal commission. If you are not sure how you are being charged, ask the broker. If you discover that the charges are way out-of-line, there may be a way for you to recover some of the money through a formal complaint.

Making misrepresentations: If important facts are withheld or you have been deceived and, as a result, you incurred financial losses, it may be time to make a formal complaint. 

Guaranteeing investment results: Has a stockbroker ever "guaranteed" that you will make money if you do stock trades through him or her? If so, it is probably better to stay clear. Mutual funds, stocks, options, and bonds all fluctuate in value and there are no guarantees.

Agreeing to share in the losses within a customer's account: A sales representative at a brokerage firm cannot share in profits or losses generated in your brokerage account. Be wary of a broker who offers to do this.

Unauthorized Trading: If you notice trades on your account statement that were not authorized by you or anyone else with trading rights on the account, the broker may be acting irresponsibly.

Unsuitable Recommendations: If a sales representative encourages you to buy investments that are not within the parameters of your investment objectives, it may be a violation of securities laws. For instance, if you state clearly that your investment objectives are conservative in nature on you new account agreement, and then a representative recommends a host of speculative stocks to add to your portfolio, it is probably not suitable. If you later incur significant losses, there may be a way for you to recover those losses.

In the new world when most investors trade online without the help of a live broker, these issues rarely come up. Nevertheless, if you feel that you have been the subject of improper activity on the part of your broker and it has resulted in financial loss, there are certain steps to take in order to rectify the situation. 

The first thing to do is to contact your sales representative as soon as the problem is identified. Obviously, this applies when the investor is actually dealing with a sales representative, stockbroker, or financial consultant and not trading exclusively online. Talk to them as soon as possible and try to rectify the situation.

If, for example, you notice unauthorized trades in your account, promptly talk to a sales representative and ask why. It could simply be an error and the trade should have been assigned to a different account. Even if the sales representative cannot offer a legitimate explanation, request that the transaction be cancelled immediately. Make clear that unauthorized trading in your account will not be tolerated.

In the event that the problem is not corrected through the sales representative, contact the branch manager. Depending on the severity of the problem, you may want to discuss it verbally and in writing. If the branch manager does not yield a satisfactory result, contact the brokerage firm headquarters in writing. Explain in detail, what happened, at which location the problem occurred, the dates, the sales representative and branch manager's names, as well as any other pertinent information. Give them two weeks to respond.

The failure of the brokerage house to respond to allegations calls for a formal complaint to the National Association of Securities Dealers [NASD]. NASD Regulation [NASDR] is an independent subsidiary of the NASD and is responsible for regulating the activities of brokers. The NASDR reviews complaints to determine whether or not disciplinary action against the firm is in order. Investors can file complaints over the Internet using the Customer Complaint Form or by writing the NASD Regulation office in their area.

Even if the NASD takes disciplinary action and imposes sanctions against the broker, however, it does not guarantee that the investor will recover any lost money or securities. Instead, investors seeking to recoup losses must consider either Mediation or Arbitration and, in these cases, lawyers get involved. Therefore, unless the losses are sufficient enough to justify hiring an attorney (they usually work for 33% to 40% of the total money awarded at the end of the case), the complaint procedure ends here.

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
Visit Fred Ruffy’s Forum
 

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