If you're still investing on margin these days, you're probably pretty thick-skinned. And that's good, because when it comes to margin calls, brokers have no duty to be coddling and communicative.
While it's traditional, and certainly nice, for brokers to inform customers when they're in a margin-call situation, they don't have to. If you get a heads-up in time to do something about it, consider it a plus.
A margin call arises when an investor borrows money from the broker to buy stock, putting up the holdings as collateral. If the stock's price drops and the investor's equity in the account -- the market value of stock above what's owed to the broker -- falls below a certain minimum percentage of the stock's market value, the broker has the right to sell shares in the account to reduce its exposure on the loan. No notice needed.
readers seem to feel brokers treat them quite fairly when it comes to margin calls. At least, those were the results of our
survey on the subject late last summer.
But unpalatable stories still creep up. Take Braden King, a
investor. He was working in Australia earlier this year when Datek sold 200 shares of
and 15 shares of
-- together worth about $4,600 -- to satisfy a margin call, he says. Though he had been online daily while he was away, he says, he received no notification of the call -- email or otherwise -- at the time.
"It is incredible to me that an online brokerage that touts itself as one of the most technologically advanced in the business can't seem to get a single email or message out to its customers in a situation like this," writes King, who says he contacted Datek about the situation when he discovered it through trade confirmations. It's "interesting that the junk email that Datek sends me seems to arrive just fine."
Datek says its usual policy is to send a customer an email the day after a margin situation arises, and each day thereafter, until the fourth day. At that time the broker would sell stock as needed if the customer did not yet meet the call by, for example, adding cash or transferring securities to the account. If, however, the stocks are in a precipitous decline "you can get sold out" sooner, says spokesman Michael Dunn.
As for Braden's situation, Datek spokeswoman Marissa Hermo says the firm doesn't comment on specific cases. While saying the firm hadn't "heard anyone say that this happened," (King does have email copies of his correspondence with the Datek) she reiterated that it's the customer's responsibility to "maintain the minimum balance. It's all in the agreement that you agree to. It's all in the legal writing."
If things get ugly, that kind of legalese is about the best investors will get. Brokers' call notification policies are vague and noncommittal.
"It's difficult to say 'generally speaking we do x,' " says
spokeswoman Melissa Gitter, adding it depends on factors like customers' portfolio holdings, their trading patterns and what's happening in the market. She adds that the firm typically tries to call customers.
, a margin situation automatically generates a snail-mail letter (unless the call is for an amount greater than the worth of the account -- that could mean swift liquidation). The firm also may attempt to call customers, but that doesn't always happen. "We don't necessarily make an outbound call for every account," says spokesman Jim Griffin. "If it's a particularly busy day we might not be able to reach everybody." The biggest accounts get contacted first.
investors generally have seven calendar or five business days to meet a margin call. A snail-mail letter goes out and a follow-up phone call is placed the fourth day after that. But if prices drop precipitously, the firm might sell sooner.
sends both a letter and an email, and if they don't hear from the customer in time, they'll try to call before they liquidate. But again, all bets are off if the market is whipping downward.
last year proposed a rule that would require brokers to disclose to all margin-account holders just how abrupt they're allowed to be, making clear that, among other things, the "firm can sell your securities without contacting you."
While that kind of disclosure rule is good in theory -- brokers can't deliver that warning too many times -- it's still the kind of boilerplate info that's already in standard margin agreements -- the stuff eyes glaze over.
Your best protection: Be preventative and manage your margin situation before your broker does it for you.