Jim Davis will probably never forget the call he received after the Labor Day weekend. The market shot up dramatically on Tuesday, the first business day following the three-day holiday. Davis, who had been on vacation with his family, had an angry message on his answering machine when he got home.
"I get this phone call from a client who's been with me for 10 or 12 years," says Davis, a St. Charles, Ill.-based rep with Investment Management & Research. "He said he was going to be moving his account."
The sin: Davis had allowed his client to keep $6,000 of a $168,000 portfolio, or less than 4%, in cash.
When the Dow shot up a record 257 points Sept. 2, the client called Davis because his portfolio wasn't fully invested. "He said, 'I was really upset to see the market go up and to have all that money not earning anything,'" Davis recalls. "He actually said there's not enough activity in his account."
Welcome to the bullheaded days of the longest-running bull market in U.S. history.
Remember, though, that while the game may have changed, the rules haven't. Brokers and financial advisers must remember they have a legal obligation to do right by their clients, even if their client wants to make a foolish trade or threatens to go to another broker.
"The broker always has the obligation of making sure the customer is suitable" for an investment, says Nancy Lininger, founder of The Consortium, a Camarillo, Calif., compliance consulting firm.
One veteran rep, who asks not to be identified, recalls an account he lost recently over suitability concerns. The client, an elderly widow and normally conservative, repeatedly requested that he buy her Netscape shares, "at something like 700 times projected earnings," the broker winces. "I just wasn't comfortable with it."
Things have gotten so crazy, some people aren't satisfied managing their own accounts-they think they can do it for others, too. Lininger says everyone from truck drivers to airline pilots, with no experience other than managing their own portfolios, want to become registered investment advisers.
Others are content with just complaining. Some brokers say clients gripe about commissions, knowing they can make the same trade on the Internet for less than $10.
Joseph Sciarra, vice president of investments at Joseph Charles in West Palm Beach, Fla., says a man he knows wanted to buy 10,000 shares of a company called Saf-T-Lok, which makes a handgun trigger lock. At the time, Saf-T-Lok traded at 50 cents a share. Sciarra told the man the trade would cost $60.
"He said, 'What? Are you, out of your mind? That's ridiculous.'"
Within two weeks, President Clinton announced gun manufacturers had volunteered to put safety locks on handguns sold in the United States. Saf-T-Lok shares jumped to about 4. Sciarra says he asked the man whether he'd bought the stock. "He said, 'No, I was still trying to get a cheaper commission.'"
The result: The investor missed a potential gain of more than $40,000 in two weeks. Within a few more weeks, however, the stock fell back to 2. "A lot of people are trying to shave commissions," Sciarra says. "But they don't have the knowledge and tools to dissect a company."
Then there's the problem of the client who won't tolerate a loss, no matter how minimal or temporary. Jonathan Wax, a rep with Raymond James in Tampa, Fla., says he helped a new client build a portfolio of stocks this year on recommendations from his firm.
"One of the investments we purchased was E*Trade at 18," Wax says. Within a week, the stock dropped to 17. The client complained. Against his recommendation, Wax agreed to transfer the several thousand shares his client owned to a discount firm. The client "immediately sold it for about 17," he says.
E*Trade rebounded, closing as high as 47 before stumbling in mid-October. The irony is the client eventually transferred the money from the E*Trade sale back to Wax to reinvest.
While clients such as Wax's often get a costly but valuable lesson by going it alone, other brokers say they're the ones who've learned something. Davis eventually decided the client who complained about not being fully invested wasn't worth keeping. "Basically, I told the guy he should transfer the account," Davis says. "Life's too short."