by Pat Huddleston, Investor's Watchdog
Seniors at Risk
Prudent seniors have saved for decades to build a cache of reasonably liquid assets to see them through their retirement years. Those assets are irresistible to financial crooks. Avoiding financial ruin later in life demands diligence. The following tips will help you protect yourself from becoming a victim of investor fraud.
Don’t Talk to Strangers
When it comes to making decisions about retirement savings, seniors must guard against the natural human desire to believe that people are trustworthy. Never invest through someone you only know from telephone conversations. Learn all you can about the person you are giving access to your retirement savings.
Do Your Homework
Do not invest in anything you do not understand. Have your broker send you literature on the investments he recommends; read it and then ask follow-up questions until you are comfortable. While you are asking questions, ask your broker whether he gets paid more for selling you this investment as opposed to another. If your broker makes you feel uncomfortable about asking these questions, you need a different broker.
At tax time, if your accountant has to wade through a two-inch stack of trade confirmations to determine your gain or loss on stock trades, you may have been the victim of churning. Churning is excessive trading for the purpose of generating commissions rather than for any legitimate investment purpose. It is the most basic of all the fraudulent schemes perpetrated by brokers. A more conservative “buy-and-hold” approach is more likely the proper approach for senior citizens.
Beware of Margin
Margin is nothing more than a loan from your brokerage firm to enable you to buy more stock. Apart from the additional commissions the firms reap from margin trading, margin interest is an enormous revenue source. Margin is dangerous, and most investors, especially seniors, simply have no business using it. If the stocks in your account fall in value and the equity therefore dips below the firm’s limit, the firm will issue a “margin call” directing you to deposit cash or securities. If you cannot do so, the firm will sell your securities to raise the equity level without asking you which stocks to sell. The firm will have no liability to you if the stocks they sell to meet the margin call eventually quadruple in price.
Unless a brokerage customer has given formal written authorization to a broker-dealer to trade in the broker’s discretion, the broker cannot properly buy or sell securities without clearing every trade with the customer in advance. In pursuit of high commissions, though, it is not uncommon for brokers to trade without authorization, hoping that the unauthorized trade will be profitable and that the customer will therefore not complain. It is important that you complain to your broker’s manager the first time your broker engages in unauthorized trading, even if the trade proves to be profitable. If you give him and inch he may take your entire nest egg.
Make sure the investment is suitable for you. Brokerage firms have an obligation to know their customers’ financial situation, investment experience, and risk tolerance, and only to recommend investments that are suitable in light of that information. But, brokerage firms and their individual brokers often make more money by trading highly speculative stocks than they do for trading blue chip stocks. Not surprisingly, therefore, brokers often recommend unsuitable stocks to their customers, support those recommendations with misrepresentations and material omissions, and close the sales by creating a sense of urgency and using other high pressure sales tactics. For example, an investor who has a primary investment objective of “safety of principal” and a low risk tolerance should not be investing in derivatives or initial public offerings, both of which are highly volatile.
Finally, if you think that you are a
victim of investor fraud, seek counsel
immediately. There are statutory time
limits in which you can bring an action
to recover your money. Investor’s Watchdog
can help you find an experienced securities
lawyer. Call us at 1-866-423-WDOG.