How Do I Protect Myself From Investment Losses?

The first step to protecting yourself from investment losses is to get as much information as possible about what you are investing in, and with whom you are trusting your money. This means doing some research before you invest. Start off by getting familiar with the financial planner and the firm that employs him. Most states’ Secretary of State or Department of Corporations can provide you with disciplinary information on your prospective financial planner via a “CRD” report. A “CRD” will give you information on the financial planners’ background, his licenses, the states he is licensed to do business in, and whether there are any customer complaints against him. FINRA Dispute Resolution also maintains similar (though less complete) information on the financial planner. A visit to their “broker check” section on their website located at www.finra.org should be part of the basic research you do on your financial planner. If your financial planner is not licensed to sell securities, this is a big “red flag” and could be an indication that he is selling unregistered securities, has lost his license, or is unable to provide clients with a full range of investment options.

Knowing who you are doing business with also means treating cold callers and telemarketers with suspicion. Although there are plenty of honest brokers working the phones, there are an equal number of brokers operating from boiler rooms. Play it safe by having the broker send you information on his or her firm and the investment before you commit to any purchases.

There are several organizations that accredit individuals who have gone the extra step to earn a degree or degrees in financial planning. The designation CFP generally means years of study and a minimum level of competence that can be relied on by a client. Similarly, beware of bogus designations like “certified wealth practitioner” or “Senior Advisor” as these designations aren’t worth the paper they are printed on, and oftentimes are a badge of fraud that investors should run far away from.

Once you have agreed to open an account, sit down with the financial planner and ask him to explain the forms you are filling out. Pay particular attention to the “new account form,” which asks you to state your investment risk tolerance, net worth and investment objectives. If you do not fill out this form yourself, ask to see a copy of it before you deposit any funds into the account. Make sure the information on investment objectives, risk tolerance and net worth is correct.

During that initial meeting, or before you invest, ask the financial planner to explain the trade confirmations and the monthly statements to you. Firms are required to send you trade confirmations which disclose the commissions paid, whether the transaction was solicited or unsolicited, and whether the firm was a market maker for the stock.

Monthly statements are complicated, and are worth asking questions about. You might be surprised to learn how the firm calculates the value in your account, particularly if your account is on margin. Several firms offer monthly statements that break down the portfolio according to sectors of the economy. Some break down your portfolio by the types of investments like mutual funds, stocks, bonds and direct investments (like REITS). Monitor this section and ask questions if the percentages become inconsistent with your objectives.

Once you open an account don’t be afraid to challenge your broker’s recommendations. Make sure you understand the risks of investing before you agree to a purchase. These risks include liquidity risks, or whether you will be able to sell the investment for what you paid for it if you need the money.

If you take time to check out the individual you are doing business with, and ask to have the forms you are filling out explained to you, you will be off to a good start. The next step is to open your monthly statement and trade confirmations as soon as you get them. If you spot anything you don’t understand, or an investment that you didn’t authorize, make a phone call. Remember your financial planner is working for you. Make him earn his commission.