NEW YORK (CNNfn) - As long as you're making money, you and your broker are best friends. But when things change, you may find yourselves on opposite sides of the table.
Proving your broker did something wrong can be expensive and difficult to prove. Seymour Goldstein found this out the hard way.
Goldstein, who had limited experience with investing, went to Raymond James Financial in 1995, talked to a broker and told him he was looking for a "conservative" investment.
Instead, he said, the broker put his money into two high-risk funds.
Goldstein said every time he went to the broker (who has since left the securities industry) to discuss the funds' poor performance, he was told the investment would eventually begin reaping rewards.
"There was never an upside to either one of the funds," said Goldstein, who said he lost a total of $17,000 with the investments. "I was conned all the way through."
Angered, he went to the brokerage demanding they repay him for his lost $17,000. According to Goldstein, they offered him $2,300, although the firm says it offered $12,000.
Looking for clues
There are a variety of warning signs which can alert you to possible improper activity by brokers.
One of the most noticeable is a high or increased amount of transaction activity in your account. Brokers make money through commissions on every trade they perform. This, sometimes, can lead to pressure to make unnecessary trades to drive up commissions.
"People need to understand that as good a friend as your broker may be, he's a salesperson who only makes money wherever there's a transaction," said Mitchell Perlstein, an attorney who represents disgruntled investors at the Investors' Law Center.
Additionally, some brokers will occasionally recommend securities which are unsuitable to your investment philosophy or misrepresent the risk involved in a security.
Even if an unwanted investment goes your way, fight it. "Just because you made money doesn't mean there was no risk," said Perlstein.
Unlike with unauthorized trades, however, proving a broker recommended the wrong investment can be trickier.
Assume, for example, a novice investor tells her broker she wants a "safe" investment for her money. Such a request could mean anything from bonds to index funds. There is often a big difference between what an investor considers broker wrongdoing and what is actually impropriety, said Perlstein..
In Seymour Goldstein's case, his broker gave him exactly what he was looking for, according to Larry Silver, spokesman for Raymond James Financial.
Silver said that the two funds did indeed lose money and were poorly managed, but that the firm's broker could not be blamed for that.
Goldstein, he said, was properly informed about his investments and given the prospectuses and was simply disappointed because he lost money.
"If that investment had made money, we wouldn't have heard a thing from him and we wouldn't have even gotten a thank-you note," said Silver.
It's self-defeating, Silver said, for a broker to put the client in a bad investment since it's easier to retain an existing client with good service than it is to bring in a new client.
"The last thing a reputable firm wants to do is send you to something where you're going to lose money."
Arbitration vs. Mediation
The securities industry offers investors two options for taking on a broker outside of a court: mediation and arbitration.
The difference between arbitration and mediation is much like the difference between going to court and agreeing to settle.
When you sign up with a brokerage, you will usually ink an agreement which says you agree to settle future disputes through arbitration. Even if you haven't signed such an agreement, you can usually push the securities firm into entering arbitration.
Arbitration provides a cheaper alternative to a court fight, while maintaining the binding aspects of the ruling.
Under arbitration, disputes are settled by the organization that supervises the markets where the transaction took place. (The organization, such as the National Association of Securities Dealers Regulation, chooses an impartial arbitrator to listen to the dispute, with both sides agreeing to abide by his decision.)
The arbitrator listens to sworn evidence from both sides, before issuing a binding ruling. He then issues a win/lose judgment -- never a judgment giving both sides partial victories.
Even though the arbitrator is picked by someone in the securities industry, he is not necessarily predisposed to favoring the broker. In fact, a recent government study showed 60 percent of arbitrations resulted in an award to the investor.
However, if things don't go your way, you generally can't take your dispute to a court.
Mediation is a less expensive alternative. The NASD has a list of approved mediators to choose from, but both sides in the dispute must first approve the mediator before proceeding.
Both sides present evidence but, unlike arbitration, need only submit whatever information they feel necessary and cannot be pressed to present more.
While the main thrust of arbitration is total victory, a mediator will try to get both sides to see the issues more clearly and engage in problem-solving.
The mediator's decision, however, is non-binding. If you don't like the outcome, you can opt for arbitration or the courts.
As much as you might like to, it's probably not a good idea to try to work things out all by yourself, according to Perlstein.
If you see a problem and an informal discussion with your broker does not bring about a resolution, you should consider these other methods. If you're sent to talk with the brokerage's attorneys, they may use these discussions with you to gain statements which may be used against you later on.
Despite not fully getting back all of his disputed money, Goldstein said he is glad the he fought it out.
He said he feels it is important for people to stand up for themselves, win or lose, even if it costs them additional fees. "If you got stuck for some money, you can get stuck for a little more."
-- by staff writer Randall J. Schultz
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