NASD Newbie,

Are you for real with what you are suggesting regarding discretion?

It isn't the "compliance types" the broker needs to worry about but rather the "regulator types" that would love to see a antique like yourself get caught trying to defend yourselves with "your" interpretation of discretion.  And then once you loose (and guaranteed that you will) then your firm's "compliance types" will be instructed by those "regulator types" to review your entire trading past .......  you'd be lucky to have a home if you've been using discretion as you espouse. 

If you are still selling, "you in a HEAPA trouble boy"!

Many rules are enforced because people are too timid to violate them.

I'm telling you that if a client says, "We talked about getting out and I told him that it was OK with me if he sold the stock when he thought it should be sold" that no panel is going to come down on the broker.

I'm further saying that if the broker has a signed discretionary agreement he assumes significantly more fiduciary responsibility becasue the presence of the document verifys that the broker was not discussing the trades with the investor.

Without the document it becomes a "He said, He said" case that can fall either way.

[quote=NASD Newbie]

Many rules are enforced because people are too timid to violate them.

I'm telling you that if a client says, "We talked about getting out and I told him that it was OK with me if he sold the stock when he thought it should be sold" that no panel is going to come down on the broker.

I'm further saying that if the broker has a signed discretionary agreement he assumes significantly more fiduciary responsibility becasue the presence of the document verifys that the broker was not discussing the trades with the investor.

Without the document it becomes a "He said, He said" case that can fall either way.

[/quote]

and where does the branch manager and "compliance types" come into the picture with this signed discretionery agreement?

[quote=compliancejerk][quote=NASD Newbie]

Many rules are enforced because people are too timid to violate them.

I'm telling you that if a client says, "We talked about getting out and I told him that it was OK with me if he sold the stock when he thought it should be sold" that no panel is going to come down on the broker.

I'm further saying that if the broker has a signed discretionary agreement he assumes significantly more fiduciary responsibility becasue the presence of the document verifys that the broker was not discussing the trades with the investor.

Without the document it becomes a "He said, He said" case that can fall either way.

[/quote]

and where does the branch manager and "compliance types" come into the picture with this signed discretionery agreement?

[/quote]

Small wonder they booted you out of production, Putsy.  Given your, shall we say, casual attitude towards regulation it's a lucky thing your firm wasn't censured and fined for failure to supervise you.

Vast experience your ass.

[quote=NASD Newbie]

Many rules are enforced because people are too timid to violate them.

I'm telling you that if a client says, "We talked about getting out and I told him that it was OK with me if he sold the stock when he thought it should be sold" that no panel is going to come down on the broker.

I'm further saying that if the broker has a signed discretionary agreement he assumes significantly more fiduciary responsibility becasue the presence of the document verifys that the broker was not discussing the trades with the investor.

Without the document it becomes a "He said, He said" case that can fall either way.

Now you are assuming that clients all lie.  That's not the case and if you think it is you have a poorly defined sense of values yourself.

Virtually everybody will say that you discussed the exit strategy, nothing makes more sense than that.  If they deny that they did, they are painting themselves as either a liar or a fool.

The problem is on the other side of the equation--using the money to establish a new position.

That is where I am saying that there is NO REASON why you should not be able to talk to the investor BEFORE you put him into a new position.  Missing an opportunity because you cannot reach me in a timely fashion does not result in me losing money--it results in me losing opportunity.

On there on the fringe are the compliance problems waiting to happen--the broker who says, "I don't like to have to explain my logic to the client."

That's what you said Joe, and that makes you scary.

I guess it all boils down to whether your clients trust you or not.  Before I got my licenses I let my financial advisor make all the decisions based on the information he had about me.  He knew my liquidity needs, my comfort level, etc.  I let him run the show because that's what he was paid for.

And that's true anytime I use a professional I trust to handle an aspect of my life I want to outsource.  Doctor, lawyer, travel agent, etc.  If I trust them I tell them what I'm looking for and let them take care of the details.  If I discover they aren'tworking to my benefit or they do something that shakes my trust I'll usually give them a second chance with a bit more of my oversight.

They still get statements showing trades and positions, so they aren't out of the loop.  If you have to go to the client for every decision, what are they paying you for?  Unless you're charging a hourly/annual/etc fee for financial planning advice (which I don't), you get paid per transaction or a % of assets for managing money.  Advice is free and they can get it from nearly all of the same places you can.

Just my 2 cents.

I have been wrestling with this dilemma for a while now. Having a lot of clients with individual positions in various stocks and some of those positions being very large the potential for loss if there were to be a sudden decline in a particular stock is huge. 

Since I do not have discretionary accounts and prefer to discuss any portfolio moves with the client before the fact, I usually discuss placing stop loss, buy limit and other similar protective types of orders.  If I and the client can agree on the spreads on these orders so we don't stop out at minor market moves and we place the orders, it gives me some level of comfort.  If the stock has begun to move dramatically and I am not able to contact my client at least we have a prearranged strategy to mitigate any loss, preserve or take gains without me having to be glued to the quote monitor.  Most of my clients readily agree to this and they feel good about it too because we frequently get together and adjust the limits up or down as the circumstances require.

The issue I am having is several clients who have some big positions in single stocks (over 600K in several cases) plus other slightly smaller positions in various other stocks.  They have fallen in love with their stocks and refuse to take gains, set stop loss orders for even a portion of these positions. My warnings about being severely over-weighted in their portfolios falls on deaf ears.  Because the stocks just keep going up and up.....they don't believe me when I tell them they can lose all of their gains in just a few hours and if I am not available or I can't reach them we would be in big trouble.

I guess all I can do (and have done) is to document my conversations and have had the clients sign letters stating that I had given them this advice and that they have declined to take it.

Any suggestions on how I can get these people to smarten up?  And don't say cut them lose.  They are good clients in everything else but this plus I would lose millions of dollars from my book in stocks, bonds, mutual funds and insurance if I sent them packing.

I meant sell limit…not buy limit…   Not enough coffe yet this morning

[quote=FreedomLvr]

If you have to go to the client for every decision, what are they paying you for? 

[/quote]

You're kidding, right?  They're paying you to make suggestions regarding what they should do--but it's THEIR money and THEY should get to say yes or no.

If you went to a doctor who believes that your skull needs to be opened up and part of your brain scooped out would you think he was acting appropriately if he told you he was going to put you to sleep in a operating room because you needed to have your tonsils out simply because he didn't want to have to explain the brain surgery?

For the umpteenth time.  Use very acceptable verbal approval for your exit trade--discretion as to timing--but NEVER reinvest the money without talking to your client.

Nothing is so important that you have to be able to do it without talking to the client.  Period.

Regarding Babbling's question.

Rather than selling the stock at a stop enter it as a short sale--the legendary short against the box.

Suppose the client owns XYZ at a basis of $10 and it's now trading at $80.

You enter a sell short at 70 stop order.  If the stock touches 70 in a fair and orderly decline the trade will trigger.

At that point the client will still own his long position with a basis of $10 while also having a new short position at about 70.

The stock then drops to 55.

Cover the short and realize a short term gain of $15 to help cushion the loss of $25 in the stock.  Essentially you took them out at $70 as you wanted to, but they didn't have to declare their huge gain.

Yes they will have a $15 gain, and yes it will be short term, but they should fall on their knees and thank you for your wisdom.

In another vein, buying puts is always a possibility if the stock has options.  If it doesn't then it's probably a pretty thin issue and even stop orders might be very disappointing.

Anyway, back to puts.  Puts work great, but they cost something and if the stock does not crash you're going to look like you don't know what you're doing--plus they don't enter into the client's thought process because they don't see the stock going down.

Doesn't it take money to sell short?  Yes it does--but what happens is the long position is placed in a margin account and since we have 50% Reg T the long position will provide the shorting power to meet the call on the short against the box trade.

If you get stopped out because the stock is falling through 70 you need to come back and place a buy stop order at 70 so you cover your short sale if it should start back up in a classic whip saw.

Additionally you have to close short against the box trades within a year--otherwise they could be used to transfer gains from tax year to tax year.

Actually enter a Sell Short at 70 Stop, Limit 68 or something like that.

Youre nightmare scenario is that the stock is trading at 71.  Bad news.  Opens at 60 and you're short at 59.70--somewhere no where near 70 like your plan called for.

That is rare, but it does happen.  If it gaps like that, it's better to have a chance to talk to the client--explain what happened and allow them to make the decision.

Often--more often than not--a short covering rally will occur to drive the stock back a ways so taking the time to phone the client is not going to hurt much, if at all.

Keep in mind that whatever is happening is not your fault--in fact you are talking about a way to save their money. They're the guy who was going to hold on forever, regardless.

As you said, they fell in love with the stock.

Of course not selling at a profit is classic tax deferral.  Hadn't you heard?

[quote=compliancejerk][quote=NASD Newbie]

Many rules are enforced because people are too timid to violate them.

I'm telling you that if a client says, "We talked about getting out and I told him that it was OK with me if he sold the stock when he thought it should be sold" that no panel is going to come down on the broker.

I'm further saying that if the broker has a signed discretionary agreement he assumes significantly more fiduciary responsibility becasue the presence of the document verifys that the broker was not discussing the trades with the investor.

Without the document it becomes a "He said, He said" case that can fall either way.

[/quote]

and where does the branch manager and "compliance types" come into the picture with this signed discretionery agreement?

[/quote]

NASD Newbie,

How come you're dodging my questions oh one who is full of it and himself?

If the client has signed a descritionary agreement, then there aren't any issues or concerns regarding time and price now is there? This makes your posts on this subject moot (just like all you other ones).

Please don't go away angry ....  just go away and pester your dog, your wife and you kids (or have had their fill of you too?)

Nope--anytime there is a signed discretionary form the entire situatiion become filled with "fiduciary duty."

It is better to not have that duty if the client is complaining because it all but paints you as guilty from the get go.

The only advantage to a signed discretionary authority is the investor who licks his wounds and wanders away without talking to an attorney.

If they talk to an attorney the attorney will welcome the news that there was a discretionary power signed because that makes the broker automatically guilty for what happened.

To argue the opposite point of view akin to saying that you cannot be found guilty of statutory rape if the 14 year old consented.

Now you are assuming that clients all lie.  That's not the case and if you think it is you have a poorly defined sense of values yourself.

Virtually everybody will say that you discussed the exit strategy, nothing makes more sense than that.  If they deny that they did, they are painting themselves as either a liar or a fool.

--------------------------------------------

Newbie,

I think that opinion paints you out to be a fool.  You actually think that a client who takes you to arbitration isn't going to conveniently forget your past conversations??? Are you serious?? 

And for you to point to "a poorly defined sense of values yourself" as a reason for feeling that way, you are truly naive. 

So once again, lets recap Newbie's suggestions.  Go ahead and liquidate a falling position to protect the client and when arbitration comes expect for them to stick up for you about a passing conversation you had when you opened their account.  You will never have a problem unless the client is a liar or a fool. 

Is this crap a joke?

Newbie, you are showing your age.  I thought you said you posted to make us think, not think about how freakin off your rocker you are. 

[quote=ribsnwhiskey]

Go ahead and liquidate a falling position to protect the client and when arbitration comes expect for them to stick up for you about a passing conversation you had when you opened their account.  You will never have a problem unless the client is a liar or a fool. 

[/quote]

Where did I say you had the conversation when you opened the account?  I said you have the conversation when you establish the position.  It goes like this:

Joe, I'm not a big believer in stop orders as long as I'm around because the danger of getting whipsawed is very real--so what I'd like to be able to do is take you out if I think it's in your best interest.

I will not reinvest your money without talking to you, but I really do need to be able to get you out if you're losing money and I need to act quickly.

That does not require a power of attorney, and if he does pull you into arbitration your attorney will be able to get him to admit that he had a conversation like that.

The panel will assume that he did too, because it makes so much sense.

He will sit there thinking that if he denies having the conversation he will be tripped up with the follow up questions which will be designed to make him seem like he didn't even pay attention to what he was doing.

Again, there is no reason to have signed discretionary power--there is nothing good that can come of it.  That was true in 1976, 1986, 1996 and 2006--so it makes no difference when somebody says it.

I'm did not once argue that discretionary power was something I am endorsing. 

"That does not require a power of attorney, and if he does pull you into arbitration your attorney will be able to get him to admit that he had a conversation like that.

The panel will assume that he did too, because it makes so much sense."

Newbie, you continue to display ignorance.  I am aware of the dialogue that has to take place (remember, some of us actually have clients that we have to engage in dialoge with).  You to continue to act as though the clients are all people of high ethical standards who will stand on your side through arbitration.  You are going to be let down a lot for the rest of your short lifespan if you really believe that. 

Clients will deny that they signed paperwork that you have right in front of you, but you think they will remember a verbal arrangement for your selling procedures?

I'm not telling you that your idea of doing what is in the best interest of the client is wrong and I have no issue with your belief that you should always contact a client before making a purchase.  I think that those ideas probably make a lot of sense for most situations.  But don't be dumb and blind thinking that everyone will be forced to remember a 'he said' 'she said' argument from an attorney or a panel. 

A partner of mine semi-retired a while back and he had some clients that needed help oneday that he couldn't be there.  They had some confusion about a whole life policy they purchased 15+ years back.  They signed a form allowing the use of their dividends as a premium payment for thier policy.  They denied every making this change or approving it or even discussing it.  They became more angry and defiant and continued to insist that they never approved this change.  As I stepped out to get an additional statement on a wrap account for them, I asked my assistant to call the carrier and see when the change was requested.  Within 10 minutes I had the paperwork that the clients BOTH (husband and wife) signed less than 2 years ago authorizing this change.  When I put it in front of them to ask if they remembered the change, they again denied that it was thier signature.  I asked them if they would like to start paying the premiums out of their own pocket and they said no, to just leave it as it is. 

You put way too much confidence in people. 

Completely differnt scenario, dear fellow.

My point of view is that when you have a formalized power of attorney the dangers of being found guilty of abusing the fiduciary duty are far greater than the risk of not being believed that you discussed exit strategies with your client.

There are a lot of brokers who think that a signed discretionary authority is some sort of shield that prevents them from being liable in case the trades done with the client don't work out.

It's a form of, "You said I could do whatever I wanted with your money and this is what I did.  It's a shame that you lost money but since you said it was OK for me to do it all I have to say is 'Gosh, I'm sorry.'"

That is simply Bullschidt.  What happens is you become even MORE  RESPONSIBLE and there is no place to hide because the panel will believe the client was not consulted.

There is no bona-fide reason to have discretionary authority at the level you guys operate.  The folks who run the funds you put your clients into have it as part of the basic agreement--but you don't need it working at "Jones Asset Preservation and Shoe Repair---Securities offered by LPL Financial Services."

I do not think that discretionary authority in any way is a shield that prevents an planner from being liable in a case. 

I do think there is relevance in my example.  You say that clients will be honest about your discussions of exit strategies when confronted by an attorney or a panel.  I say that they aren't always honest when their own signature sits in front of them, so I believe that you are being way to optomistic (never thought that word would be associated with you) about how a client will behave in this situation. 

[quote=ribsnwhiskey]

I do not think that discretionary authority in any way is a shield that prevents an planner from being liable in a case. 

I do think there is relevance in my example.  You say that clients will be honest about your discussions of exit strategies when confronted by an attorney or a panel.  I say that they aren't always honest when their own signature sits in front of them, so I believe that you are being way to optomistic (never thought that word would be associated with you) about how a client will behave in this situation. 

[/quote]

It doesn't matter what they say--you are allowed to say it, and the panel will believe you because it's the way any relationship will be handled.

If the client denies having the discussion when faced with you saying that it occured they will be the one who appears to be disingenuous.

What you have to avoid is having their attorney hang you with "Fiduciary Duty" which is most easily avoided by never accepting it in the first place.