On Brokerage Account Forms, the Truth Shall Set You Free

Make yourself a marathon runner in your personals ad. Drop 10 pounds on your driver's license.

But tell the absolute truth when filling out an application to open a brokerage account.

Aside from the old saw that honesty is the best policy, shooting straight on your application takes on great significance if, down the road, a dispute arises as to whether your broker handled your investments in a proper fashion.

On a new account application, you'll be asked about your investment experience, knowledge, income, net worth and investment objective. The broker will use that information to make suitable investment recommendations based on your financial situation and needs. If you exaggerate or lie about your investment experience or risk tolerance, you could run into serious trouble later on if you ever claim that your broker was selling you inappropriate investments. Ultimately, any dispute will go back to what you put on that form.

"Make sure you tell the broker exactly what you want," says Ira Sorkin, an attorney with New York law firm Squadron Ellenoff Plesent & Sheinfeld. "It's critical."

The information on your account application gives your broker and the firm what they need to assess the suitability of various investments.

Suitability, a key buzzword in the brokerage business, is the root of many investor complaints. A suitability violation occurs when a broker makes an investment that is inconsistent with an investor's objectives, and the broker knows or should know that the investment is inappropriate.

There is no immutable standard of suitability, of course. If you're a 31-year-old music company executive with a net worth of $10 million, you can certainly shoulder more risk than a 71-year-old widower living off his pension and Social Security.

Your account application not only tells the broker what you need or can bear. It also gives the firm's branch manager and compliance department the necessary information to make sure that the trading in your account is acceptable, which is part of their job as supervisors.

You don't want the form to indicate that you are speculative and willing to take high risks if you aren't. If it does, "that can be used against you down the road," says Mark Maddox, an attorney with Maddox Koeller Hargett & Caruso in Indianapolis.

On a new account form, you'll be asked about your investment knowledge and experience. More experience would mean you have the capacity to understand more complex investments. You'll also be asked for your annual income and liquid net worth.

You'll also be asked about your investment objective -- what you want out of your money.

On a typical new account form, the choices might be: preservation of capital, income, growth and speculation. On some applications, like the ones at Prudential Securities and Salomon Smith Barney, you might be asked to rank two or more objectives according to primary and secondary goals.

The key is to know what these objectives mean. If you don't know, you should always ask your broker. In a nutshell, capital preservation is the least aggressive, meaning that you are primarily concerned with avoiding a loss of money and willing to accept minimal risk. Income would mean you want to generate income with a low degree of risk. Growth and speculation are much more aggressive objectives. On its online brokerage account application, Fidelity gives short-term or day-trading strategies as examples of speculation.

You may also be asked more detailed questions like: What types of investments have you made in the past? Where are you now from a financial standpoint and where do you want to be five or 10 years from now? These questions are all to assess your profile.

Very often when opening a full-service brokerage account, the broker will be the person who actually fills out the account form -- not you. Attorney Sorkin says the broker might take the information down over the phone or have an assistant do it.

If that's the case, make sure you see the form or some letter that confirms what was written on the application. When you get this confirmation letter from your broker, review it carefully and retain your copy. You must ensure that your goals and risk tolerance are accurately defined.

If speculation is checked on your form and you're a retiree on a limited income, you may not have any recourse if you eventually have a complaint against a firm for selling you tech IPOs that went bust.

"It's important for you to get a copy. It can come back to haunt you," says Morgan Bentley, an attorney representing both investors and brokers in Newark, N.J. "If a customer complains about trading in the account, they come back and say, 'Hey, you wanted speculation.' That's what the broker put down."

To be sure, it's in a broker's best interests from a professional and legal standpoint to meet the expressed needs of a customer. But for a variety of reasons, such as poor communication between customer and broker, bureaucratic mishaps and, occasionally, broker malfeasance, things can go wrong.

"Some corrupt firms will check speculation on virtually every new account form," says attorney Maddox.

Bentley says one of his clients had his net worth overstated as $4 million by a broker. "They are using it to justify very speculative and very excessive trading in his account. They are trying to say he was a sophisticated individual."

If a broker inaccurately fills out your form, complain and make sure it gets changed. Or you can read it as a sign to take your money elsewhere. Investors can afford neither honest nor dishonest mistakes.

A handy tip when filling out a brokerage application: Get humble. "Unfortunately, this is where people's egos get the best of them. It's harder to say, I don't know what I am doing," says Mitchell Perlstein, an attorney with the Investors' Law Center in Boca Raton, Fla. "Sometimes you get somebody who inherited stock from an uncle and held onto it for 15 years and that translated on the account statement as 15 years of experience."

Of course, the information on an application protects not only you, but also the broker. In a dispute, the broker and the firm are going to argue that they were using the information on your account form to make investment recommendations and supervise your account. If the information is wrong, you may not have any recourse.

Ultimately, you must also make sure that the information in your application is accurate and up-to-date. Some firms will periodically confirm with the investor that his or her profile is correct and current.

Does all of this hold true for online brokers?

Right now, there's unresolved debate as to what extent suitability requirements and "know your customer" rules apply at online brokerage firms because they don't typically recommend stocks or other investments.

That said, you'll likely be asked similar questions on online brokerage applications, and you'll be well served by sticking to the truth, the whole truth, and nothing but.

Give Your Portfolio a Makeover

We have some good news for those of you brave enough to bare your financial souls in public.

TSC soon will launch a new monthly feature in which readers can submit their portfolios to be evaluated by professional financial planners. The new Monthly Makeover will replace our quarterly Portfolio Planners feature.

If you're a do-it-yourselfer, but you've always wondered what a pro would do with your portfolio, the Monthly Makeover could be for you.

Here's how it works: If you're interested, send a note to [e-mail] and tell us what's in your portfolio. Give us enough details -- dollar values or percentages -- so we can determine how your assets are allocated. Also tell us a little about yourself and your investing goals.

Each month we'll select a portfolio that we feel is interesting or instructive, and we'll ask a financial planner to offer suggestions for fine-tuning or, if necessary, overhauling it.

Remember, this exercise will be conducted in public, in front of all of our readers. So if you're squeamish about making your financial life public, this may not be for you.

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