Tell the average investor that 89% of his peers think their brokers treat them fairly on margin calls, and he'll likely laugh and point you to some poll that finds 87% of male drivers enjoy pulling into gas stations to get directions.
Yet hard as it may be to believe, an overwhelming majority of participants in
Online Broker Survey
say they feel good about the way they were treated when brokers forced them to repay loans or sell stocks to meet their debt.
*Question drew 945 responses.
Investors who buy stocks on margin are essentially borrowing money from their brokers and putting up their holdings as collateral. It's when the value of those holdings falls below a minimum level -- typically 50% of the borrowed funds, although firms can require more -- that a margin call is made. That's when a firm takes action to get more funds to shore up a client's position. Depending on the amount of the shortfall, the broker can sell holdings without warning.
In April, these margin calls became standard for investors who had been well-fed by the bull market for more than two years. When tech stocks started to crash, and when the
Nasdaq's fall was capped by a 355 point drop in early April, brokerage firms that had lent clients money to buy more stock began calling those funds back home. Indeed, 945 of the more than 2,400 people responding to the survey -- almost 40% -- said they had faced a margin call at some time.
Investors caught in the squeeze were forced to ante up more cash for their positions or dump shares of stock into a falling market. For these bull-market babies, it was a wrenching surprise to have the brokers who once courted them pumping out dunning letters.
Online Broker Survey
Reliability Improves; Rankings
Cutting Out the Middleman
Profiting From Your Trades
Mellow About Margin Calls
How We Tallied the Scores
Evidence to the Contrary
survey results seem to contradict empirical evidence pointing to rising investor discontent with margin calls. The
National Association of Securities Dealers
says the number of margin-related
arbitration claims by investors against their brokers will reach at least 200 this year, double the challenges filed in any one year in the 1990s.
The cheerier survey results may reflect firms' efforts to repair damaged customer relations since April's showers of margin calls.
Still, in emailed comments accompanying the survey votes, there were a smattering of complaints from investors who said they weren't notified of margin calls in time to salvage their positions. More common were complaints of having to deal with staffers who weren't very knowledgeable about margin calls.
The Nasdaq's slide in April, said New York securities attorney Bill Singer, was a "fire drill ... and I don't think the industry responded well."
As a result, Singer, there has been pressure on brokerage firms to make it clear to clients that margin loans are demand loans and can be called in with no notice. Firms also may have become more proactive in explaining that while tradition dictates clients should get three days to fulfill their loans, firms are not legally bound to wait that long before selling out a margined stock position.
Since then, Singer said, brokerage firms have felt pressure to make it clear to clients that margin loans are demand loans that can be called in with no notice. Firms also may have become more proactive in explaining that while tradition dictates clients should get three days to fulfill their loans, firms are not legally bound to wait before selling out a margined stock position.
While 44% of survey participants who encountered margin calls say they received an ample three-day warning, others wrote in to complain that firms didn't work too hard to get in touch with them.
One respondent said
gave him no notice, merely leaving a message on his home answering machine after selling his securities. "There was no email, no call at the office," the investor said. "I would have wired the money, if I had the chance. I lost thousands of dollars."
, a program manager in Phoenix, was hit with some margin calls during April's carnage. In some cases, he said, margin calls were made that shouldn't have been. It caused him to temporarily abandon his E*Trade account at
"There were times it seemed like I know more about margin than they do," said Gartley, who puts his investment experience at about three years. "When margin requirements changed on some stocks, they didn't even know how to do the calculations."
Ronald D. Sirianni
customer, complained: "It's as if they are using students who may be doing a residency program and aren't sure of themselves. Try calling and finding how much you can margin, and it's different each time. Certainly
they're not using their calculations based on the Web site."
But brokerage firms say they are shoring up these areas of weakness. At
Morgan Stanley Dean Witter Online
, for instance, about a third of customer-service phone reps have an NASD Series 7 license -- the same certification required of brokers -- according to Thomas O'Connell, the firm's president. The goal is to have 50% of those staffers licensed, he added.
O'Connell said MSDW Online has "almost quadrupled" its bricks-and-mortar real estate for customer service facilities and increased training across the board.
A Schwab spokesman said every employee in contact with client accounts is Series 7 registered, and that those in the credit area -- which typically handles margin calls -- get additional training. "We work with them to have a heightened degree of sensitivity and of customer empathy," the spokesman said.
Still, when the market tumbles, the margin calls rise. O'Donnell said MSDW Online's margin calls in early October were only about 25% of what the firm saw in the spring. Typically, MSDW investors get a call when a loan exceeds 35% of the account value -- and they're given a week to add cash to the position. If that number falls to 15%, they get a call and/or an overnight letter, and they must meet their requirements by the next day, O'Connell said.
Firms have also raised margin requirements for volatile stocks, making some impossible to buy on margin. O'Connell said he thinks that's a prudent move. "High margin requirements protect the firm and the investor," he said. "New investors are always susceptible
to margin problems."
"No one's forgotten
April's slide," O'Connell said. "I see people who are timid
from that, who realize they are responsible for the decisions they make."