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Red Flag Prospects

Some potential clients send out the wrong message. When you see these danger signs, proceed with caution.Austin Drukker has developed something of a sixth sense about investors during his 15 years as a producer."You develop a feel for people after a while in this business," says Drukker, a broker at Merrill Lynch in Ridgefield, Conn.So when a prospective client came into Drukker's office a few years

Some potential clients send out the wrong message. When you see these danger signs, proceed with caution.

Austin Drukker has developed something of a sixth sense about investors during his 15 years as a producer.

"You develop a feel for people after a while in this business," says Drukker, a broker at Merrill Lynch in Ridgefield, Conn.

So when a prospective client came into Drukker's office a few years ago for an initial meeting and kept peering over his shoulder for a peek at the computer to see how the market was performing that minute, Drukker saw red flags waving and heard warning bells ringing.

Since he focuses on comprehensive financial planning and long-term investment strategies for clients, Drukker knew instinctively that this anxious investor could be trouble.

And at this point in his career, with $85 million in assets under management and 300 accounts, Drukker is not afraid to tell hyperactive traders and stock market hobbyists that another broker might be more appropriate for their type of investing.

"There's not going to be a fit every time," he says.

Drukker is not alone. Across the country, brokers are screening out prospective clients that might cause problems, present personality conflicts or be extremely high-maintenance.

Here are six broad categories of "problem clients" that can walk through your door, and the signals to watch for before you slide the new account form across the desk:

1) Cheapskates and Litigators Clients who break the ice by demanding discounts usually become troublemakers, says Bill Singer, a partner with the law firm of Singer Frumento in New York.

"During my years of private practice, I have run into a few public customers who have sued reps on multiple occasions," Singer says. "Quite frankly, they seem to be pretty easy to spot."

After demanding a discount, they launch into a tirade about the lousy service they received from their former brokers. Sometimes they'll reminisce about their trading history, recounting their experiences in excruciating detail, asking: What do you think? Do you think these trades were suitable? Do you think he churned my account?

If the conversation goes in this direction, you can investigate your prospect through subscription-based Internet services such as Lexis (, Westlaw ( or McDonald Information Service ( to find out if the investor has ever sued a rep.

"You merely enter that person's name into the `party' field of a search, and you will get a record of his litigation and arbitration," Singer says. Or, better yet, ask someone in your compliance department or an attorney to do the legwork and check out the investor.

You can also ask the prospect outright, "Have you ever sued another broker or been sued yourself?"

Peter Boutin, managing partner with the broker defense group at Keesal Young & Logan in San Francisco, recently represented a producer in a disciplinary proceeding against a client who had filed at least eight legal claims against other brokerage firms in the past.

"When we ultimately defended the case, it was very helpful to point out that this particular client had an inclination to file claims," Boutin says.

2) Chronic Complainers When a prospective client walks into the office and starts complaining, wave the white flag, says Vincent DiCarlo, a former SEC staff attorney who now represents both investors and brokers at Bartel Eng Linn & Schroder, a law firm in Sacramento, Calif.

"If a broker meets a new client who starts off by telling him how his last three brokers did him wrong, the new broker should assume he's next and politely show the client the door," he says. In fact, DiCarlo teaches classes for brokers on how to avoid lawsuits and mentions these whiners as prime examples of the types to avoid.

"They are not so much scammers as chronic complainers who have developed a habit of blaming other people for their failings and disappointments," DiCarlo says. Although complaints in general are a danger sign, gripes about lawyers, accountants, doctors or other professionals are particularly revealing, he says.

"Of course, an actual con artist probably won't reveal himself so easily," DiCarlo says. "But those types of scam artists are much less common than the complainers."

3) Con Artists and Scammers When an investor walks in with a suitcase full of cash, most brokers know something is rotten. But the red flags raised by money launderers, terrorists and other scam artists aren't always so obvious, says Mike Di Girolamo, chief compliance officer at Raymond James Financial Services in St. Petersburg, Fla.

Be careful with prospects who: - Wire money from overseas accounts (especially from drug-producing countries).

- Brag about having a huge stash of money and want to place an order immediately, promising the funds are on their way. "If the trade does well, they'll come up with the money, and if not, they'll walk on it," Di Girolamo says. "Unfortunately, that happens more often than we would like, especially with new reps who haven't been around the block."

- Bring in a certificate for a security you've never heard of, especially if it's foreign. "Don't do the trade until you can verify the authenticity of that certificate," he says. The certificate could have been forged or canceled.

- Call you out of the blue and say they have $19 million in Treasury securities to sell immediately because their company needs cash. "People with that kind of money don't pick your name out of the phone book or an advertisement," Di Girolamo says.

4) Wanderers Some prospects may end up in front of you because they move like nomads from firm to firm. "It's like someone who has been married and divorced five times," says Indianapolis attorney Mark Maddox, former Indiana securities commissioner and current president of the Public Investors Arbitration Bar Association. "They are more likely to have problems than the average investor."

So, ask your prospect if he has had accounts with other brokers. Ask for details about his experience with other firms and about any lawsuits or arbitrations he has been involved in. Even if the investor hasn't filed any formal complaints, a long string of broken relationships at other firms should raise eyebrows.

"That may be an indication that no matter how hard you try and how capable you are, this is somebody you will never satisfy," Boutin warns.

5) Friends and Relatives If possible, avoid taking relatives as clients, says David Robbins, an arbitration expert and attorney with Kaufmann Feiner Yamin Gildin & Robbins in New York.

"They will tell the arbitrators that their trust in the broker was so great that they never thought to question him or to read confirms and monthly statements," Robbins says. They might also claim that they signed the new account form without filling in any of the pertinent information, letting the broker add the particulars, he says.

Getting too friendly with clients can be hazardous, too, Robbins says. Customers who call every day to shoot the breeze or make idle chatter often tell arbitrators that the broker became such a close friend that they had total faith in his judgment.

Also, pay special attention to any client who wants to open a joint account with his or her older relative, Robbins adds. "If the young customer is calling the shots and losses occur, you'll hear for the first time that it was the old relative's money that was being invested and that the broker's recommendations should have taken into account the old person's suitability."

6) Gamblers and Misfits If you don't want clients who start screaming at you every time they see a 250% return advertised somewhere, don't take people chasing unreal performance in the first place, says Bill Worobec, a 25-year broker with First Union Securities in Williamsport, Pa.

"The best way to manage expectations is to regulate who goes through the turnstile," Worobec says. The typical gambler strolls into the office with $50,000 and is determined to turn that tidy sum into $1 million over the next five years by investing in a single technology stock.

"Some brokers will say, `To hell with it. Someone's going to get this money. Why don't I get it and just do it?'" Worobec says. "I won't."

One good reason for not taking the business is that some arbitrators will hold the broker responsible for allowing the customer to put all his or her eggs in one basket, even if the overconcentrated position was unsolicited, Robbins says.

Besides rejecting gamblers, Worobec also looks for "psychological matches." During the interview with the prospective client, he rifles through a mental checklist of questions to determine whether he and the prospect are compatible. Is he comfortable with this person? Can he communicate with the individual effectively? Is the person rational?

If there is no meeting of the minds, a partnership just isn't possible, Worobec says. His rule of thumb is to do business with people he likes - a mantra he learned from his mentor, Tom Ashbridge, more than a quarter century ago.

"I've tried to remember that, and when I do, things work out fine," Worobec says. "I've also compromised over the years, and every time I've done so, I've regretted it."

When screening clients, a little common sense and healthy suspicion can help you avoid those who could bring more harm than good.

Here's a list of problems with prospects that should grab your attention.

Beware of a prospect who:

1) Is overly concerned about the market.

2) Is a friend or relative.

3) Has a post office box address.

4) Wants a joint account with an older relative.

5) Has unrealistic expectations.

6) Insists on overconcentrating.

7) Has an account at a discount brokerage.

8) Demands discounts from you.

9) Complains about former brokers.

10) Had problems with prior advisers.

11) Shows a history of lawsuits or arbitration claims.

12) Changes brokers frequently.

13) Is uncommunicative or secretive.

14) Makes you uncomfortable.

15) Has an overseas address.

16) Holds an unfamiliar stock certificate.

17) Must trade immediately.

18) Has large sums of cash.

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