The first thing you will be asked to do after you have decided on an investment professional is to fill out the "New Account Form". Investment professionals are bound by the "know their customer" rule. Simply stated, this means that your investment professional is forbidden to place you in an investment that is "unsuitable" for you. However, the only way that your investment professional can observe this rule and know what is suitable for you is for you to be absolutely honest with them.
Don't overinflate your financial status in order to impress your investment professional. Remember, the consequences can be disastrous. Incorrect information could result in your investment professional placing you in unsuitable investments. Under these circumstances, any losses would be your responsibility, not the investment professional.
Understand the Terms on All Forms
The new account form, and any others forms, are intended to protect the investor, the firm and/or the investment professional. Make sure that you understand all the terms on these forms.
Typically, the investment professional will ask the new investor for information on their assets, income, financial objectives, and investment experience. Based on the answers to these questions, the broker will ask you to check boxes next to the appropriate investment objective. Again, honesty is all-important here.
Often the terms on the new account form can be very confusing. Ask your broker exactly what each term means before you check one. If you are not comfortable with the definition of the terms, don't check them.
Define Your Goals
Insist that your investment professional note what your goals are in language that you understand.
For example, if your spouse has recently passed away and you have received an insurance settlement upon which you will be relying for living expenses, this money is likely irreplaceable. Therefore, your goal may be ultraconservative, such as "preservation of capital." If this option is not on the form, make sure that your desires are noted on the form by your investment professional.
Unless a particular objective is a specific goal, it should not be checked. Some investment professionals will list objectives in order of preference. At the time, this may seem logical, but if there is ever a problem with an investment, the fact that speculation is checked at all could mean that you do not have a basis for a complaint.
It is advisable to write your investment professional a letter stating your financial goals, your investing experience, and your understanding of what he or she said. Keep a copy for your investment notebook and ask the investment professional to put it in your file at the firm. Always keep copies of everything you sign and all correspondence.
Ask for Copies
Always ask for a copy of the new account form and make sure that all information is entered correctly. Make sure that your new account form is current. As your circumstances change, you need to update your new account form.
Good Communication is Key
Good communication is essential. At the time you open your new account, you and your investment professional should decide on the level of communication necessary. It will vary greatly depending upon your objectives. If you have 4 or 5 investments invested for long-term conservative growth, you will probably only need to communicate with your investment professional once or twice a year.
If, on the other hand, you have a large portfolio consisting of aggressive growth investments, you may want to talk with your investment professional several times per week.
In any event, your investment professional should be willing to speak with you whenever you have questions regarding your account. Keep up on the current value of your investments. Read the annual reports, especially the statement of the company's earnings, past performance, and where it is headed.
Beware of Risk-Free Investments
Be very skeptical of investment professionals who minimize the degree of risk involved in an investment strategy. An important element in evaluating any investment is the knowledge that there are no risk-free investments. Demand straight answers to the question of risk. If you sense that it is being soft-pedaled or misrepresented, don't invest or seek a new investment professional.
If You Have Questions – Contact DFI
If you have questions, contact the Washington Department of Financial Institutions Securities Division at www.dfi.wa.gov or by calling 1-877-RING DFI (1-877-746-4334).