I just opened an account for a new client who said he had lost a lot of money with another firm. The ACAT (automated customer account transfer) delivered securities purchased at the earlier firm. In reviewing the client's monthly statements it became clear to me that the prior activity was not suitable for either the investment objectives or the risk tolerance of the customer. Should I say anything to my client, or should I just make the changes that I think are appropriate?
Keep in mind that the interests of your client come first. Find out if the objectives and risk tolerance that the customer presented to you were the same as those he discussed with the prior broker. Sometimes, a client will tell you that they are risk adverse because they are now retired, but were working during the previous relationship. This might impact how much risk was suitable for him at that time.
Assuming that you have determined that positions should be sold and new ones purchased, that process includes recommending securities that you have a reasonable basis for believing are suitable. Full and complete disclosure must include a description of what you are suggesting be purchased as well as why existing positions have to be sold. That is the context in which the conversation should occur.
For example, if your client is a conservative income investor who came to you with a small-cap growth portfolio, it appears that this person has little or no understanding about how various types of investments function. Take the time to educate and explain the differences in product and strategy, but be careful about giving legal advice.
Too many brokers tell their customers about remedies that may not be accurate or realistic. I have had prospective clients come into my office saying, “My broker tells me that I have a slam dunk case against my former firm because my account went down in value so much,” and wanting to commence arbitration.
Experienced claimant's attorneys will want to see significant documentation, including monthly statements, tax returns, correspondence, as well as a trading/profit-loss analysis before a decision to accept or reject a potential case is made. Remember cash and securities withdrawn impact the amount of any claimed loss. Therefore, be careful about promising recovery of investment losses to your new client without a complete understanding of all of the issues involved.
Philip M. Aidikoff
Aidikoff & Uhl
Beverly Hills, Calif.
As a registered representative you have certain ethical responsibilities to your client. In fact, NASD Rule 2110 requires that registered reps “…observe high standards of commercial honor and just and equitable principles of trade.” As such, a registered representative is required, among other things, to make investment recommendations that are in the best interest of the client. See NASD Rule 2310.
Pursuant to Rule 2310, registered representatives should take into consideration the following information when making investment recommendations to non-institutional customers: financial status, tax status, investment objectives and any other information that should reasonably be considered.
You should be guided by these principles and make investment recommendations to alter the portfolio as needed to meet your client's presently stated investment objectives and goals. However, you are not obligated to pass judgment on the investment recommendations made by another registered representative. Further, you are unlikely to have enough information to do so. If debating whether to comment on the portfolio and, in essence, guide your client towards a formal complaint you should consider, first and foremost, that you have just met this individual. Are you absolutely confident that the client has disclosed everything to you? As the new registered representative you may not be privy to all of the customer's financial and life circumstances. Also, consider that the client's investment goals and objectives may have changed over time. It is probable that the client's presently stated investment objectives are a direct result of his past experience.
Should you decide to pass comment on the prior portfolio, you may unwittingly involve yourself in any ensuing litigation. If the account was transferred internally, speak with your manager. Your manager can assess the situation and determine whether an accommodation should be made for the client. If the account was transferred from another broker/dealer, you may not have enough information to correctly assess the situation.
Jennifer Woods Burke, Esq.
Lubiner & Schmidt Cranford, N.J.
Ethical Rep is a monthly feature in which more than 30 prominent securities attorneys, experts and law school professors help Rep. readers deal with work-related ethical quandaries. Have you encountered a situation at work that makes you uncomfortable? Are you confused about how your responsibilities to clients might change as regulations continue to evolve? Drop a line to Rep.'s contributing editor, Ann Therese Palmer, and our group of experts will help you work through the problem.
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