Opening a Brokerage Account

Whenever I interview a potential new client, I review with them the same information that would generally be contained on a new account form. This is because the new account documents sets forth all of the information that is needed to compare the suitability of all of the subsequent activity that took place in a customer’s account from a security specific discussion, to the type of trading strategy employed.

Most, if not all, new account documents require the customer to give his name, social security number, address, telephone number, current employment, marital status, annual income, net worth, banking information, investment experience and investment objectives. From an investor’s standpoint, providing this information accurately is of paramount importance for a number of reasons:

  • It provides the account executive with certain basic information, which he should take into consideration when recommending what he believes are suitable investments and/or investment strategies for you.
  • Initially, it provides information to the account executive concerning your level of investment expertise so that he has some idea as to the level of investment information he needs to supply to you for you to make an intelligent investment decision.
  • Because it is the responsibility of the firm to have in place a reasonable system of supervision over the account executive and the activity in your account, this information allegedly provides the firm with a baseline for it to perform this supervision.

Also, at the time that you establish your account you need to decide whether or not you want a cash or margin account (option accounts will be dealt with in a separate post). These terms mean exactly what they imply. Either you have to fully pay for the purchases that you make or you can borrow money from the firm to help pay for your purchases. Please make sure that before you make this decision you have a full understanding of how long you have to pay for a cash purchase, if you do not have the full purchase price in your account, or have a working understanding on how the proposed margin account would work. There are many characteristics of cash and margin account that are not discussed herein. Take as much time as you need to understand all of the requirements associated with these two types of account. Most firms have written materials that will provide the rules and regulations relating to these accounts. Please read them. Keep in mind that the use of margin to purchase or hold security positions in your account generally increases the risk that your account is subject to.

Margin accounts are unique in the manner that they work. If you look at the fine print on the margin agreement, you will see that the firm has the right to sell out your margin positions if it feels in jeopardy. You also need to understand such terms as initial margin, maintenance margin, house call (a form of margin call), Reg T margin call and what other margin rules apply, like the fact that you can’t margin a stock that has a market price of under $3 per share. I have seen this later circumstance start a liquidation roller coaster that the client could not get off which ultimately caused him substantial damage.

What You Should do in Opening a Brokerage Account!
  • Tell the truth: Do not try and present a financial, education or investment experience picture of someone that is not you. I have seen a tendency over the years, for potential clients to make themselves appear more knowledgeable in financial matters then they really are and to “overstate” they income and assets. This can only hurt the clients if something goes wrong in their account. First of all, how do you explain to an arbitration panel that you did not tell the truth. Secondly, it is through these initial disclosures that the firm performs its compliance reviews of the activity in your account, with after passage of time, the actual activity that takes place.
  • Completely fill out the form: For some reason, most customers do not keep copies of their new account documents (for that matter, some people don’t keep copies of all of their statements). Consequently, at the initial meeting with them we have to get the potential client to fill out documents allowing us to request this information from the firm, which delays the consultation process. Be that as it may when the documents are reviewed, I have had a substantial number of clients over the years say to me that, especially the investment objective and risk tolerance section of the new account forms, the information is not in their handwriting and is incorrect. In most cases, either all or some critical part of the information was filled in by the account executive and not checked by the customer. If the account executive is asked about this circumstance, he will simply testify that the client told him that, that he let the client review the form for accuracy and that the trading that he recommended was in line with those objectives, which could be completely different from what the client thought.
  • Get a clear understanding as to the parameters of your broker’s fiduciary duties that he believes that he owes to you and what you expect from him: This is important for both sides of the table to understand. It is important for the account executive to understand so that he knows what type of reliance that you are placing on him. From the client side, the client needs to know exactly what the account executive has agreed to do for him. This is always one of the major contentions that arises in an arbitration dispute. The law has fashioned three types of variables relative to the duties that are owned. These will be discussed in greater depth in another post. They are the duties created when the account is non-discretionary, discretionary, and hybrid.
  • You always have options: If you feel that the account executive that you were assigned or that was referred to you is bullying you or for some other reason you just don’t feel comfortable in dealing with him or her, you have a few choices. First, you can try and work your way through the process so that this feeling is overcome. Second, you can ask to speak to the office manager, which you should do anyway before you leave, and ask for another account executive. Third, just leave and go talk to someone else.

Some firms, after the account relationship is established, will send you a negative consent letter in the mail, confirming some or all of the information contained on the new account document. If some of the information is incorrect, immediately take steps to correct the inaccurate information. Don’t let the account executive blame the error on computer problems. Get a written confirmation of the correction.

A final word on the information contained on the new account documents. If the initial information is accurate but any of your circumstances change, it is important to notify the firm, in writing, immediately so that your information is updated. It is this new updated information that will then be used to determine the suitability in your account

By the time that someone comes to see me, the process referenced above has been completed, usually for quite some time. We therefore have to look at the activity, in your account, from a number of different standpoints to determine whether or not this activity or the investment strategy used was suitable for you. One of the major issues to be explored is the exact nature of the relationship that you had with the account executive. This has an impact on suitability and whether or not their was a breach of any duty owed to you.

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If you believe you have been the victim of securities or stockbroker fraud or misconduct, we can help you explore your options and discuss whether you may be able to make a financial recovery. Located in Boca Raton, Florida, we represent clients across the United States. Contact us to arrange your free initial consultation. We return all calls by the end of each business day.

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