By LEN BOSELOVIC
Pittsburgh Post-Gazette
24-OCT-05
As director of the Duquesne University law school clinic serving aggrieved investors, professor Alice Stewart has heard her share of horror stories. One of her favorites involves a broker who told his client he had to take investment losses for geopolitical reasons.
"The client left scratching his head saying, 'I must be stupid. I don't get it,' " Ms. Stewart recalls.
Stupid is as stupid does, which is all too often the case with investors. No matter how much ink is spilled promoting "if it sounds too good to be true, it probably isn't" and other self-evident maxims the obvious still flies over the heads of many investors.
"While they are obvious, they are in no way in the forefront of someone's mind when they're investing money," says Joseph Grieco, vice president with Sky Wealth Management.
So, for those who need to be hit over the head yet again, here are a few ounces of prevention.
"As a customer, and particularly if you're a new customer, you ought to make a broker put every recommendation in writing. Tell me why this is the best thing for me," says Charles W. Austin Jr., a Richmond, Va., attorney who represents investors who have been harmed.
The explanation should include the brokerage firm's research on the investment or analyses compiled by investment researchers Morningstar or Value Line, Austin says. It should also compare the performance of the broker's recommendation with similar stocks or mutual funds. "If they can't do that, I wouldn't do business with them," Mr. Austin says.
In Grieco's mind, the biggest problem is "hyperactivity," otherwise known as churning. It refers to frequently selling investments and buying new ones. Many times, the only one who benefits is the advisor or broker.
"Every time (an investment) moves, it generates a commission," says Grieco.
That raises another issue where many investors are in the dark.
"It's amazing how many people I meet who don't fully understand how their advisors are paid or what they are paying," says Geordie Crossan, president of NBS Financial Services.
Crossan has seen clients who previously were put into similar funds in five different mutual fund families. Because fund families discount sales commissions based on how much is invested, they ended up paying more in commissions than if they had invested all the money with one provider.
When an advisor or broker mentions variable annuities, "the words alone should send a red flag up," Austin says. Variable annuities, which offer a blend of life insurance and investment, can be appropriate for some investors. But they are frequently sold to investors who have no business being in them, which has made them a major headache for regulators.
Before investing in one, Austin recommends asking for a comparison between buying a variable annuity vs. purchasing life insurance and investing in mutual funds similar to those offered by the annuity. Make sure to ask for research on the performance of the funds the annuity invests in and all of the costs involved, including what the broker will collect.
"Don't be too embarrassed to say you don't understand," Austin advises. "Don't take anything less than a full answer."
Still, even if you ask sharp questions, you may be overwhelmed by jargon. Here's what Stewart says to do about that: "If it sounds too sophisticated to make sense ... it's probably a bad deal."
Brokers who promise high returns on an investment without asking about the big picture _ your objectives, tax considerations, risk tolerance _ should also be avoided.
"That's a big red flag," warns Crossan.
If a fund recommended by your advisor hasn't panned out and you haven't received a call from him or her to discuss what happened and other options, be on guard.
"If you're not having any level of communication with your advisor, that is a warning sign," Crossan says.
Be wary of the late night infomercial pitch demanding that you act now. In his 20 or so years in the business, Grieco says "I have seen less than a handful of things where you had to act now."
Finally, don't trust your money to a stranger.
"I think customers ought to check their existing broker's record at least once a year," Austin says. One place you can do that is at NASD, formerly the National Association of Securities Dealers. To check up on a broker or brokerage firm, call 1-800-289-9999 between 8 a.m. and 8 p.m. Eastern time Monday through Friday. Or go to www.nasd.com and click on the link to NASD BrokerCheck.
Although Austin says the disclosure system isn't perfect, it is improving. He suggests you may have better luck with state regulators.
(Distributed by Scripps Howard News Service, http://www.shns.com.)
