Don't exaggerate your investing knowledge or wealth


Q. You often recommend that people invest in a diversified portfolio of stocks and bonds. I want to open an account with a brokerage firm but am getting confused by the many questions on the account application. Would it hurt me if I admit I don't have that much investment experience or don't make that much money?

A. It could hurt you if you don't admit it. In the event of a dispute with the brokerage firm - for example, if you allege that a broker steered you into an unsuitable investment - it could weaken your case considerably if you exaggerate your investment knowledge or experience, or how much money you have.

If you do that, the brokerage firm could more easily claim that you knew what you were doing and could afford to take more risk.

"If you are trying to impress the financial adviser, don't," said Bruce Sankin of Coral Springs, Fla., a member of the Board of Arbitrators of the National Association of Securities Dealers. "The best advice I can give you is, don't exaggerate your experience or income in the account form."

Arbitration - a form of dispute resolution in which both parties present their case to a panel of three arbitrators, whose decision is binding - is the way of life in the brokerage industry.

As a condition for opening an account, every brokerage firm I know requires investors to agree to arbitration and waive their rights to seek remedies in court, including the right to a jury trial.

That's why the brokerage client account form is so important.

"The client account form might look like a basic questionnaire with simple questions, but it is the document that shows if you are suited for certain types of investments," Sankin said.

"Do not answer these questions lightly or inaccurately. It could cost you dearly in the future."

If you get into a dispute with your broker and cannot come to an amicable resolution, media- tion and arbitration could be the next steps. Mediation is a less formal process in which a mediator tries to bring the parties together. If mediation fails, arbitration could be your only legal remedy.

But the arbitration hearing might be held years after the original conversation between you and your broker about the investment in dispute.

"I can almost guarantee you that the adviser will remember the conversation differently than you do, making the verbal discussions unreliable and meaningless" in an arbitration claim, Sankin said.

An arbitrator and mediator for the NASD, Sankin is the author of a manual used by state regulatory agencies that explains the step-by-step process of resolving investment disputes and seeking recovery of losses (an abridged electronic version of the manual is sold at a discount at Sankin's Web site,

Knowing your rights is important. In 2004, about 85 percent of investors who filed a complaint with the NASD and mediated their claim came to an agreement, which means they got at least enough back of their investment losses to settle their claim, Sankin said.

In the 2,019 claims that went to arbitration and were decided, investors were awarded damages in 1,113, or 55 percent of the cases, according to statistics at the NASD Web site,

"When you put these percentages together, in 2004 about 93 percent of all claimants who knew their rights and used the system that the NASD offers" got back at least part of their losses, Sankin said.

To protect yourself and bolster your chances of recovery in any claim, follow these tips from Sankin when filling out the application form:

If you are on a fixed income, say so. That makes the brokerage firm aware that you have no additional income other than your investments, pensions and/or Social Security benefits, and that you probably will be a conservative investor.

Put down your actual liquid net worth, exclusive of the value of your home, and not a penny more. If you say you have more money than you do, then an unsuitable or risky investment would appear to represent a smaller percentage of your net worth than it actually is.

If you want safety of principal and income, do not mark "growth" as your investment objective. Make sure you update the account form if your financial situation changes, for example, if you retire or your spouse dies. Notify the brokerage firm in writing and fill out a new account form.

Humberto Cruz is a columnist for Tribune Media Services. E-mail him at

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