THE CLIENT ACCOUNT FORM:

Be Careful What You Say!

By Bruce Sankin

Arbitrator and Mediator / National Association of Securities Dealers / NASD

Member: NASD Board of Arbitrators

Consumer Advocate on Investor’s Rights.

 

When you go to a brokerage firm to invest your money, you go with the understanding that the information your financial advisor will provide is accurate and truthful, so that you can make an informed decision on your investments. Usually, the first time you hear about an investment is either in your financial advisor’s office or on the phone with your financial advisor. Since he is the professional on investments you accept his advice. You also assume that what he is doing is in your best interest. A problem can arise months or sometimes years later when you realize that you were sold an investment that you were unsuited for, or an investment about which you did not understand the risks involved.

 

If this happens to you, and you and the brokerage firm cannot come to an amicable solution, then arbitration could be your legal remedy. The arbitration may take place years after the original conversation between you and your financial advisor regarding the investment you purchased. I can almost guarantee you that the financial advisor will remember the conversation differently than you do, thereby making the verbal discussions unreliable and meaningless. That is why the client account form, usually the only written document the financial advisor has that describes you, becomes so vital in your defense at arbitration. Thus, the most important and least understood document the financial advisor has a client fill out is the Client Account Form. Every person must fill out an account form to receive an account number. This is mandatory before a transaction between you and your financial advisor can occur. 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. Do not answer these questions lightly or inaccurately. It could cost you dearly in the future.

 

Before I review the Account Form line by line, I want to emphasize the best advice I can give you. DON’T EXAGGERATE YOUR EXPERIENCE OR INCOME ON THE ACCOUNT FORM. If you make $30,000.00 a year, do not state anything higher. When the question is about your investment experience in stocks, bonds, commodities, etc., only put the actual number of years you have been an investor. If you are trying to impress the financial advisor, DON’T!

 

 Now I will show you how a brokerage firm could interpret your answers on an account form. A standard Client Account Form will contain the following questions:

1. General Information - name, address, birth date, social security number, telephone number. So far no problem.

2. Residence - rent or own. This shows the brokerage firm, right away, that if you own a home, you are not ignorant of all types of investments. Also, if you own a real estate limited partnership or a REIT you would have some idea of the liquidity and economic risks involved in owning real estate. Thus, if the partnership had decreased in value, you could not claim that you were unaware of the risks in real estate.

3. Legal residence if different from mailing address –

 This shows the brokerage firm if you have more than one home, which is an indication of your assets.

4. Employment/Job Title/Occupation –

This may show the type of knowledge you might have pertaining to investments in certain industries.

5. Client state annual income. Client state net worth exclusive of family residence, and estimated liquid net worth - DO NOT EXAGGERATE. This shows the brokerage firm what portion of your assets is in a specific investment. Having a diversified portfolio of no more than 2-5% of total assets in one investment may not be worth as much in an arbitration decision as 50% in one investment.

6. Is the client on a fixed income - Yes or No –

 If you are, then say it. By checking this box the financial advisor should be aware that you have no additional income other than your investments, pensions, and/or social security, and that you will probably be a conservative investor.

7. Is the client an officer, director or 10% stockholder in any corporation –

 This tells the brokerage firm that you probably have knowledge about business and investments and also that you have additional assets.

8. Citizen of U.S.A. (if other please specify) –

 If you are not a citizen of the U.S., there may be different tax liabilities depending on your investments and the country that you are from. The financial advisor must be aware of this; otherwise, the brokerage firm, not you, could be liable for any losses incurred.

9. Former client or account with other brokerage firm –

This shows the brokerage firm the type of investments that you may have made in the past. This will also indicate if you are knowledgeable or

suited for certain types of investments.

10. Investment profile –Very important!

If you want safety of principal and income, DON’T SAY GROWTH! Put down only what you want. Also remember, do not put down more investment experience in stock, bonds, options, etc. than what you actually have.

11. Introduction –

This is where the brokerage firm finds out how you came to open an account. The options are usually seminars, walk/phone in, advertising, personal acquaintance, and referrals. Seminars, personal acquaintances, and referrals may sound innocent, but let me show you what they imply: If you went to a seminar it shows you go out of your way to get knowledge on specific investments. Brokerage firms may say if you have gone to one seminar you may have gone to many and that you are aware of different types of investments and are probably suited for many investments. If you are referred by a person who is knowledgeable about investments, then there is a good chance you have had discussions about investments, which could imply that you know more about investments than what is stated on the account form. These are possibilities of how a brokerage firm may look at your account form.

12. References - name of bank.

 If you ever have a problem with the brokerage firm they may want to know about your knowledge of investments. References would be a good place to find out this type of information.

13. Power of attorney –

This means someone besides yourself has the right to handle the money in your

account, as well as decide what investments should be made. Be very careful with this, giving someone else this authority may affect your financial situation forever.

14. Account description - cash or margin.

Cash accounts are the most common. In a cash account you buy or sell a security (stock, bond, mutual fund, etc.) and pay or receive 100% of the amount, usually within five business days. A Margin Account gives you the right to borrow money on your

account (a loan) by using the securities in the account as collateral. For example: If you buy 100 shares of General Electric at $40.00 a share; the total amount you would owe is $4,000.00. In a Margin Account you could borrow up to 50% of the amount owed, which means you would pay $2,000.00 and the brokerage firm would lend you the other $2,000.00 for as long as you keep the General Electric stock in your account. Like any

other loan, you will pay interest charges to the brokerage firm for as long as you owe them the $2,000.00. Buying on margin is O.K. as long as your financial advisor explains, AND YOU UNDERSTAND, both the risks and the benefits.

 

OTHER IMPORTANT ACCOUNT FORM INFORMATION

 

It is very important to update the account form if your situation changes, i.e. a spouse dies, your financial situation changes, you retire, etc. Make sure your financial advisor is notified in writing and a new account form is filled out. In case a dispute arises between you and your broker, another fact that you should know is that the financial advisor must be licensed in the state where you are a permanent resident. If you buy securities from a financial advisor and you lose money, make sure that he was licensed in your state at the time of the transaction. If not, the trade should be voided and you should get all your money back.