Arbitration on Claims Under
The Texas Securities Act
Brokerage accounts, new account agreement, and related account documents typically include designations regarding an investor’s investment objectives and risk tolerances. These designations are what govern how the firm supervises your account, and what level of risk is considered appropriate for your account. If they are not recorded correctly, your broker may be able to invest your assets inappropriately without anyone readily knowing that such investments are, indeed, inappropriate. You should know how your account is coded, and more importantly, what it means in terms of your tolerance of risk and how your account is invested.
Investment Objectives are often described differently by each firm. Further, the definitions of each objective may not be clear or obvious to the investor. Investment objectives are often categorized as Growth
, Preservation of Capital
, Income
,Growth With Income
, Total Return
, and many other descriptions. Many investors find these terms confusing unless adequately explained.
Risk Tolerance generally describes how much money you are willing to lose in order to seek a certain level of return. Most appropriately, an investor’s tolerance for risk should help define their investment objective. For example, if a retired couple believes they want their retirement funds to grow
, the broker may simply code the account with an investment objective of growth
. However, if the Growth objective at that firm means that the couple will be exposed to the risk of losing 10% to 25% of their principle in any one year, they may not want to risk that kind of loss, and unless they are advised of the amount of risk, they may naively believe they are, indeed, growth
investors. On the other hand, if they are aware of the risk, and are concerned about the risk of loss, then the broker should probably make the investment objective more conservative, until the investors are comfortable with the level of risk.
Unfortunately, many investors are not aware of the risk of loss in the account, and are more than happy to indicate their desire to grow
their money—who doesn’t want their money to grow? When the market declines and the investor loses significantly more money than what the investor was willing to risk, then this is indicative of the broker not making suitable recommendations. In such an instance, the investor may be able to recover losses from the unsuitable investments through arbitrations.
Every investor should know how their accounts are coded, and specifically what risk is permitted by that designation. If the accounts are for whatever reason inappropriately completed, the firm may be responsible for the resulting losses.