Common Investor Problems and How to Avoid Them
The Financial Industry Regulatory Authority (FINRA) operates an Investor Complaint Center that is designed to receive complaints from investors regarding their brokers and/or the firms that employ them. Their role is to investigate these complaints for potential violations of securities laws or regulations. The below information discusses some of the most common problems reported by investors in their complaints to FINRA.
Listed below are the four most frequently reported problems made by investors filing complaints with FINRA:
Misrepresentation can occur when a broker purposefully makes untrue representations of material facts or omits material information. This can happen in any security in any account, but this problem is commonly found with low-priced, speculative securities because of their increased risk.
2. High-Pressure Sales Calls (Cold-Calling)
High-pressure sales calls (sometimes referred to as cold-calling) occur when an investor receives unsolicited or unwanted phone calls—using high-pressure, persistent tactics—soliciting the purchase of securities. This is most frequently found with low-priced, speculative securities.
How To Avoid This Problem
NASD's Telemarketing Rule (NASD Rule 2211) limits the calling time to between 8 a.m. and 9 p.m. Brokers calling must identify themselves by providing their name, firm name, address or phone number. If you do not want such calls, ask the caller to place you on the firm's "do-not-call" list.
A suitability problem can involve any security and occurs when an investment made by a broker is inconsistent with the investor's objectives and investing profile (e.g., age, financial status, long-term goals, income and net worth of the customer). For instance, the broker encourages an investor to purchase an investment that the broker wants vs. an investment that may be best suited to the investor. An example of such an investment would be a recommendation to make a significant investment in a highly speculative security to an investor with a fixed income or the need for monthly income.
How to Avoid This Problem
Read and understand the terms of any new account agreement you may be asked to sign with the firm. Make an informed decision before agreeing to allow the broker to use discretion in buying or selling your investments. Also, fully understand how margin and other credit provisions work and the circumstances in which you could be asked to pay additional monies.
Unauthorized trading involves the purchase or sale of securities in a customer's account without the customer's prior knowledge and authorization. This can occur with any security. For example, the broker may believe a transaction is in the investor's best interest but cannot or does not contact the investor, and then makes the trade anyway. Or, the broker attempts to convince the investor of the benefits to the transactions in the hopes that the investor ratifies trades after the fact. Remember, brokers generate commissions through executing transactions (sales or purchases). That is why you should pay close attention to activity in your account.
How to Avoid This Problem
Always repeat instructions to your broker to promote a clear mutual understanding of the transaction.
If you believe you have been subjected to unfair or improper business conduct by a securities professional, FINRA encourages you to voice your concerns. Your first course of action should be to report the matter to your brokerage firm's management and contact the firm's compliance department to discuss any concerns about the broker's conduct. However, if you, your broker and the firm cannot resolve the matter, there are effective alternative dispute resolution mechanisms available to you, including mediation and arbitration. FINRA has full-fledged Mediation and Arbitration Programs in place for investors.