Your Brokerage Investment Objectives
Like so many aspects of life, terms of art can sometimes hinder effective communication. In one of my cases, the broker testified that he asked his client what his investment objectives were and the client replied, "To Make Money!" This cavalier response sent a message that the client was willing to take big risks in order to get big gains. The broker noted "speculation" as the clients investment objective, yet the client testified that what he meant was that he wanted his money to grow, but not at the expense of his principal.
"Investment objective" is a term of art in the securities industry. It does not mean that you know what specific investments you want to make. Nor does it require some abstract or philosophical response. Several standard choices when opening a brokerage account are:
Safety of Principal
- You dont want to lose any of the money you are investing. You are generally more comfortable with conservative, stable investments and are not willing to take any risk of principal (the only risk you might be willing to assume is the amount and certainty of the income or appreciation).
- You want or need to generate income from the money you are investing and you are willing to take some small risk in order to receive increased income.
- You have more of a long term investment horizon. You may be saving for a future goal and you are willing to take some risk (approximately 10% of your portfolio) in order to increase your growth potential..
Growth & Income
- You want diversification to achieve a combination of both income and some capital appreciation. You are comfortable with moderate risk.
- You are willing to lose all or a substantial portion of the money.
- You are investing in order to maximize your returns.
Most customer-brokerage disputes center on the issue of what were the clients investment objectives. Setting investment objectives can be difficult for several reasons. First, the great majority of investors dont have a clear understanding of what they want to do. And for those who do, they do not clearly express it. Second, brokerage firms usually require their brokers to check a few pre-printed boxes of investment objectives (such as those above) on the new account form. These categories may prove to be either too limiting or too susceptible to interpretation.
A third problem reared its ugly head in one recent arbitration case of mine. The broker had checked all of the above boxes for the clients investment objectives, reasoning that the client said she wanted to do a little of everything. This defeats the purpose of the information - how can the manager supervise the broker to ensure that suitable investments are being made? Arguably, everything is suitable and the broker has carte blanche to recommend anything and everything under the sun to you.
Make sure that your investment objectives reflect the overall guideline for how you want your investments handled. Dont focus solely on what specific type of investments you anticipate purchasing over the years, because you may buy a little of each type. Your investment objectives should reflect the bigger picture for the majority of your money.
Don't let terminology get in the way
Dont let terminology get in the way - use your own terms to describe what you think you want. Say things like, "Id like an annual return of X%, but I dont want to risk more than X% of my monies invested." Percentages are the great equalizer - no matter what amount of money you are dealing with, the principle is the same.
Your broker should assist you in determining your investment objectives by asking you a series of questions, as follows. You would be well advised to send your broker a letter apprising him of the following facts, lest your broker neglect to get everything down.
- Your age
- Your tax bracket
- Your upcoming financial needs (do you anticipate withdrawing one third or more of your total cash and investments for a major purchase, college tuition, or home mortgage?)
- Your need for income, whether you have adequate funds for emergency financial needs
- Your expected future earnings over the next 5 years (planning on retiring, new job, promotion, going part-time)
- What percentage of your monthly income is used to pay installment debts (credit cards, auto loans, etc.)
- What percentage of your total investments does the current investment make?
- Your ability and willingness to take risk
- Your investment knowledge and prior investing experience
Clearly spelling out your investment objectives is like the oil in a complicated piece of machinery - it allows you to monitor your brokerage account; allows your broker to determine what investments are suitable for you, and allows your brokerage firm to properly supervise your account.
Contact Ms. Stoneman, Stoneman Law (719) 783-0303 Free Consultation, Nationwide Representation.