STOCKBROKER PROBLEMS
Know Your Customer
The maxim in the retail securities business is “Know Your Customer.” It requires that retail brokers have reasonable grounds for believing recommendations are suitable for customers given their resources and Investment objectives.
Financial consultants must use due diligence to determine the Investment objectives and risk tolerance of each customer. In the typical “non-discretionary” account those Investment objectives are “growth Income” or “total return” [growth and income]. A customer’s risk tolerance is usually measured as “conservative,” “moderate” or “aggressive.” Some forms also include the category “speculation.”
With the increasingly common “managed accounts,” investment management responsibility is delegated to an investment manager or managers who manage the account consistent with a particular management “style.” However, asset allocation studies have concluded that the mix of stocks, bonds, and cash has much more to do with performance than any particular manager. Market timing and security selection play a minor role.
It is critical that loss management policies are tied to customer knowledge. If an investor cannot tolerate a significant loss of principal, it is incumbent upon the financial advisor to know this, and to take proactive steps to protect a portfolio. Recent advances in an account executive’s ability to place stop losses and limit orders in the OTC markets make it indefensible to over expose a retired customer’s principal to market risk. The representative must alert the customer to market risks to which the portfolio is exposed.