If you invest with a stockbroker, here's an assignment. When you finish reading this, pick up the telephone, dial your broker's number and ask for a copy of your "new-account form."
While you're at it, ask for any amendments that have been made to the form since it was first filled out.
The new-account form may be new to you, but it can be a very important part of establishing and keeping a good relationship with your broker. Each brokerage has its own form, but it generally includes the broker's interpretation of your investment goals, risk tolerance and investing experience, as well as more mundane information like name, address, age, income, occupation and marital status.
Don't be surprised if you've never seen one of these forms or if you don't recognize it; your broker may have filled it out after your first interview and sent it to the branch manager and regional headquarters, but never showed it to you.
At some firms the information on the form is entered into a computer, which is supposed to flag an investment that's riskier than the customer should have.
"Most firms don't have customers sign the form," says Michael Unger, a Boston securities lawyer and a former director of the Massachusetts Securities Division. "But you can certainly have them send you a copy."
Some firms, however, try to see that customers get a copy.
"We send a photocopy of the form back to clients," says Martha Payne, spokeswoman for Advest Inc., a brokerage in Hartford. "Then we ask them to please take a look at it and make sure it's right."
"It is our policy to send the new-account form to clients after it has been filled out and checked," says Marie Uhrich, spokeswoman for Piper Jaffray Inc., a regional brokerage in Minneapolis. "But we expect the client to check it and let us know if anything is wrong."
"We don't routinely send a copy," says Donald Froude, branch manager for the Boston office of Baltimore's Alex. Brown & Sons. But people can get it if they ask."
Alex. Brown's form lists these investment objectives: aggressive growth, growth, growth and income, income, tax reduction and capital preservation.
At Merrill Lynch, which only sends a copy on request, the form lists income, growth and total return as investment objectives; and conservative, moderate and aggressive as risk factors. It also has spaces to show the customer's investment experience, including frequency of trades and types of investment products used, ranging from mutual funds to options. At some firms, there is a space to indicate an interest in speculative, or high-risk investments.
If the information is not correct, it's probably a simple mistake or misunderstanding that can be fixed easily. In a few cases, however, it may be a deliberate falsification.
"I've seen brokers who checked the 'speculative' box on every form," one former broker says. Speculative investments can include new issues of stock, stocks of small companies and other high-risk securities. Not only are these investments riskier, most of them also pay higher sales commissions, giving dishonest brokers another incentive to falsify the new-account form.
The basis of the form is a rule in the securities business called "know your customer." In the first meeting with the investor, the the broker is supposed to get enough factual information, as well as a sense of the customer's needs and risk tolerance, to make suitable investment recommendations. Or, if it's a "discretionary account," where the broker buys and sells securities for the customer, those trades are supposed to fit in with the criteria outlined in the new-account form.
This is supposed to make sure the investments are suitable for the investor. Suitability, or the lack of it, is one of the major causes of problems between brokers and investors. In many securities arbitration cases, the dispute centers on whether an investment was suitable for a particular investor. A 75-year-old widow who needs income, for example, should not be investing in the newly issued stock of several small companies, unless she has sufficient wealth and other sources of income to cushion major losses.
Even if you opened the brokerage account several years ago and there haven't been any problems, you should still ask for a copy of the new-account form, says Eric Holt, director of compliance at Dean Witter Reynolds, the brokerage unit of Sears, Roebuck & Co.
"I would encourage customers to ask for it," Mr. Holt says. "Things may have changed in the interim." Since the original form was filled out, you may have gotten married or divorced, had one or more children, changed jobs so you're now earning more money (or less), or become widowed. Any of these events may dictate a new investment strategy and a different tolerance for risk, Mr. Holt notes. In these cases, a new form may be `D required, although an amendment may be sufficient.