As to the suitability questions (income, net worth, objectives):
When I was younger I worked with a securities lawyer who was building a claimant's practice suing bad brokers, and my assessment is the system is seriously stacked against the customer and in favor of the securities brokers. The fine print in every account agreement says you waive your right to a trial, and agree to industry arbitration where 2 of the 3 arbitrators come from the Financial industry and the 3rd is someone who clearly has some interest in doing arbitrations hearings in this area. My assessment after second chairing 3-4 of these was the best case scenario is you might get your lost money back. On the industry side, there is little incentive NOT to screw the investor.
I recall the suitability questions (income, net worth, objectives) being used as a weapon against claimants/victims in the NASD (now FINRA) hearings. We would be representing a 65 year old woman with a high school education whose $100,000 inheritance (that she needed to live) was churned away in high risk stocks by the local franchise strip mall securities broker. The first thing the big city lawyer representing the brokerage firm would ask on cross examine was about our client's answers on the suitability form.
Industry Lawyer: Says here you are a growth investor.
Unsophisticated client: Yes sir.
Industry Lawyer: Well right here on the back of page 4, in the bottom of the 7th paragraph, it explains that "you understand that Growth means you are asking your broker to take aggressive high risk positions with your money." Isn't that true?
Unsophisticated client: Uh, I have never seen that before.
Industry Lawyer: SO you sign legal documents without reading them?
Unsophisticated client: Uh...
Industry Lawyer: Says here you even asked YOUR broker, this nice young man, to open a SOPHISTICATED Margin Trading account on your behalf.
Unsophisticated client: What's a Margin account?
Industry Lawyer: That's where Sophisticated investors like you trade Puts and Calls and trade Options.
Unsophisticated client: I never did that.
Industry Lawyer: Isn't this your signature on this MARGIN ACCOUNT agreement?
Unsophisticated client: Uh, yes.
Industry Lawyer: No further questions.
Me on redirect: I am looking at this MARGIN ACCOUNT agreement opposing counsel asked you about. Isn't this the form the Broker had you sign saying you could have a visa card attached to your account?
Unsophisticated client: yes, that's exactly what it is.
Me on redirect: So you got a visa card and all of this talk about you being a sophisticated investor trading puts and calls is a bunch of hog wash?
Unsophisticated client: Exactly.
When I was younger I worked with a securities lawyer who was building a claimant's practice suing bad brokers, and my assessment is the system is seriously stacked against the customer and in favor of the securities brokers. The fine print in every account agreement says you waive your right to a trial, and agree to industry arbitration where 2 of the 3 arbitrators come from the Financial industry and the 3rd is someone who clearly has some interest in doing arbitrations hearings in this area. My assessment after second chairing 3-4 of these was the best case scenario is you might get your lost money back. On the industry side, there is little incentive NOT to screw the investor.
I recall the suitability questions (income, net worth, objectives) being used as a weapon against claimants/victims in the NASD (now FINRA) hearings. We would be representing a 65 year old woman with a high school education whose $100,000 inheritance (that she needed to live) was churned away in high risk stocks by the local franchise strip mall securities broker. The first thing the big city lawyer representing the brokerage firm would ask on cross examine was about our client's answers on the suitability form.
Industry Lawyer: Says here you are a growth investor.
Unsophisticated client: Yes sir.
Industry Lawyer: Well right here on the back of page 4, in the bottom of the 7th paragraph, it explains that "you understand that Growth means you are asking your broker to take aggressive high risk positions with your money." Isn't that true?
Unsophisticated client: Uh, I have never seen that before.
Industry Lawyer: SO you sign legal documents without reading them?
Unsophisticated client: Uh...
Industry Lawyer: Says here you even asked YOUR broker, this nice young man, to open a SOPHISTICATED Margin Trading account on your behalf.
Unsophisticated client: What's a Margin account?
Industry Lawyer: That's where Sophisticated investors like you trade Puts and Calls and trade Options.
Unsophisticated client: I never did that.
Industry Lawyer: Isn't this your signature on this MARGIN ACCOUNT agreement?
Unsophisticated client: Uh, yes.
Industry Lawyer: No further questions.
Me on redirect: I am looking at this MARGIN ACCOUNT agreement opposing counsel asked you about. Isn't this the form the Broker had you sign saying you could have a visa card attached to your account?
Unsophisticated client: yes, that's exactly what it is.
Me on redirect: So you got a visa card and all of this talk about you being a sophisticated investor trading puts and calls is a bunch of hog wash?
Unsophisticated client: Exactly.
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