The following is a list of warning signs, or “red flags,” that may point to mismanagement of a securities or brokerage account. Existence of one or more of these warning signs does not always mean actual mismanagement, but further inquiry is strongly recommended.
- The client’s initial contact with the broker (used herein to mean stockbroker or other investment professional) was through a “cold call.”
- The client is vulnerable to suggestions or pressures exerted by the broker due to age, infirmity, lack of sophistication, or other similar factors.
- Whether sophisticated or not, the client does not understand the nature of the investment the broker has purchased.
- The broker uses high-pressure tactics to obtain client approval for trades or purchases.
- The broker makes promises of high returns coupled with low risk.
- The broker claims to give client access to investment opportunities normally available only to very wealthy or otherwise well-connected investors.
- The broker ignores or disparages client’s stated investment objectives and risk tolerances.
- The broker places trades without the client’s prior permission.
- The account statements reflect a high level of activity, with securities often being held short periods of time.
- The portfolio is overweight in volatile stocks in the technology, biotechnology, internet, energy or other “hot” sectors.
- The account has significantly underperformed benchmarks such as the Dow Jones Industrial Average or the S&P 500 Index.
- The account statement reflects risky investments, such as volatile stocks, derivatives (options, futures, foreign currency), microcap stocks (small companies with unfamiliar names), and bulletin board stocks (not listed on major stock exchanges).
- The cash balance reflected on an account statement unexpectedly shows up as a negative number, usually meaning securities have been purchased on margin.
- Unexpected withdrawals of cash, particularly by wire transfer.