Are you a responsible investor?

21 April 2014 06:49 am Views - 2851

During the past few weeks we have addressed the need of educating yourself on the stock market prior to investing. An equally important factor is to manage your relationship with the stockbroker firm/investment advisor and refrain from unwanted disputes that could have an adverse impact on one’s portfolio. The relationship you build up plays a pivotal role when selecting suitable stocks, managing the portfolio and determining the return to investment.
Whenever people work jointly towards a common goal, which is in this instance maximizing profits in the market, there is a possibility of facing conflicting situations as a result of the conduct of either parties or even both. It is a two-way process as stated below.

• Issues emanating from the conduct of investment advisors/stockbroker firms.
• Issues emanating from the conduct of investors.

An in-depth analysis on these disputes reveals that in most cases it is the negligence of both or either parties that causes disputes. It is true that necessary measures could be taken. Yet, you open your portfolio to undue risk. Thus, today’s article will identify these conflicting situations you might face and stipulate the remedies to rectify the issues with the aim of avoiding such situation. As the famous English proverb states, “Prevention is better than cure”.



Issues emanating from conduct of investment advisors/stockbroker firms

•  Investment advisors purchase and sell shares without the consent of the client.

At times investors complain about their investment advisors purchasing/selling shares without informing them. An investment advisor’s role is to advise the investor and the final investment decision is made by the investor (client). In such an instance, purchasing or selling shares without the consent of the investor is inappropriate. However, it will be slightly different if the client has signed a discretionary account as it allows his investment advisor to trade without his consent.

•  Investment advisors purchase/sell shares at a price different to

what was instructed.
Purchasing and selling shares at a price different to what was instructed could have an adverse effect on the portfolio and return to investment. Yet, it is important to bear in mind that it is not always possible to execute transactions at the stipulated price. There can be slight deviations. Investors should look sharp only if there is persistent deviation in the transactions executed.    

• The quantity of shares purchased or sold by the advisor might differ from the instructions given by the client.

There can be slight changes in the quantity purchased/sold based on the prevailing market conditions. Further on, there can be human errors at the point of entering the data. If an advisor intends to enter 100 shares of company X, he might by mistake add another zero that would increase the quantity to 1000. In such a situation, an investment advisor is expected to inform the client at his earliest and rectify the error trade. If these errors continue, stringent measures should be taken by the investor.

• Purchasing shares of a company that is different to what is instructed by

the client.
The possibility of an error trade pertaining to the company is less compared to the instances discussed above. Hence, such behaviour should be addressed in a timely manner.

• Purchasing shares on credit without informing the client.

At times certain investment advisors might execute transactions on credit without informing the client. Issues would arise if such stocks don’t go in line with the investor’s financial goals.

• The stockbroker firm fails to settle the money for executed transactions.

Usually the proceeds of your transaction will be remitted to the account three days after the sale of shares. Failure to do so might give out signals on the financial credibility of the stockbroker firm or simply negligence of the company.   

• Investment recommendations given by investment advisors lack solid reasoning.

Investment advisors might employ fundamental analysis or technical analysis to give out recommendations. It is important to base these recommendations on solid reasoning and research based on the method used. At times they might give out recommendations that lack solid reasoning. There is a higher possibility of such stocks not performing as expected and thereby exposing the portfolio to unwanted risk.

• Certain advisors trade far above the limit the client could shoulder.

Credit involves interest payment. Thus, it is vital that advisors bear in mind the client’s financial credibility prior to purchasing on credit. Unfortunately, certain advisors fail to draw a balance and end up trading excessively on credit.
There can be situations that are not addressed above that could cause disputes. However, it is important to bear in mind that these incidents are not frequent. Investment advisors and the firms they represent usually act with utmost integrity and responsibility. Hence, unwanted pessimism is not required.

(To be continued next week)