Posted by on Nov 10, 2014 in Blog, Columns |

By Jason Zweig | 11:04 am ET  Nov. 7, 2014
Image Credit: Christophe Vorlet

If you get a “happiness letter” from your brokerage firm this time of year, be worried.

 Such letters go out because the firm’s internal monitoring software has detected activity that could be harmful to a client and could lead to arbitration claims or regulatory penalties.

Attorneys and former brokers say the mailings tend to be considerably more common in the fourth quarter, when brokers are driven to hit commission targets and their managers are trying to earn bonuses.

The point of these letters is to elicit an acknowledgment from you that you are satisfied with how your account is being run; that’s why they’re nicknamed “happiness letters.” But industry insiders also call them “CYA,” or cover your a–, letters because they serve as a tactic to minimize liability.

If you receive such a letter, immediately search your account for signs of activity that seems inappropriate or not in keeping with your instructions to your broker. Failing to do so could hamper your ability to recover damages down the road.

A typical letter of this kind opens by warmly thanking you for your business—and mentioning the results of a periodic, routine review of the activity in your account.

The tone then turns more bureaucratic. Perhaps “concentrated positions” have arisen, “trading velocity” has accelerated or the “cost-to-equity ratio” has jumped. In plain English, your broker has put a potentially dangerous amount of your money into a single asset or is trading your holdings much faster than usual, or you are incurring unusually large commissions.

The blend of blandness and jargon lulls many investors into thinking nothing is wrong. Often, they throw the letter away after reading it—or, as requested by the firm, sign it and mail it back.

Don’t make that mistake.

“It is critical that investors review the information” in a happiness letter to ensure that the account is being run in accordance with their wishes, says Susan Axelrod, an executive vice president at the Financial Industry Regulatory Authority, which oversees brokerage firms.

Finra doesn’t set specific standards for how these messages should be worded or what they should request of clients. But, Ms. Axelrod says, such a letter should explain in clear and simple language exactly why you are being contacted, which aspects of your account the firm is asking you to review and whom you can contact to discuss any concerns raised in the letter.

If you later take the firm to arbitration to try recovering any losses, how you handled the happiness letter could be a critical piece of evidence.

If you ignored or tossed it out, the firm will argue that you thereby tacitly authorized its conduct. If you signed and returned the letter, the firm will contend that by doing so, you gave explicit approval for whatever was going on in your account, no matter how risky it was.

Happiness letters vary widely in their wording. Some don’t even request you to sign and return them, but you still can’t ignore them.

Consider a letter sent in 2010 from FMSbonds, a brokerage in Boca Raton, Fla., to one of its clients, Ronald Johnson of Overland Park, Kan. The letter noted that Mr. Johnson’s account had purchased unrated or below-investment-grade bonds, which are considered to be speculative. The account registration didn’t list “speculative” among Mr. Johnson’s objectives, so in its happiness letter FMSbonds informed him that “if you wish to update your account information to include this objective going forward please let us know.”

The letter then added, “Unless you instruct us differently, we will presume that from time to time you may wish to purchase [speculative] bonds.” The letter didn’t include a formal request for such an instruction.

Mr. Johnson died in 2012. Diane Nygaard of Kenner Nygaard DeMarea Kendall in Kansas City, Mo., a lawyer who represents the Johnson family trust in an arbitration proceeding against FMSbonds, says that Mr. Johnson never responded to the happiness letter. Meanwhile, she contends, the brokerage was making rapid, unauthorized trades that resulted in hundreds of thousands of dollars of costs and losses.

FMSbonds says all the trades were initiated by Mr. Johnson and that the letter was intended to alert him that the trades he was making were riskier than he had originally said he was comfortable with.

“This was not a discretionary account,” says Dennis Richard, a lawyer at Richard & Richard, a Miami law firm representing the brokerage. “All trades at FMSbonds must be directed by the client, as was done here. No trades are made without the client’s direction.” The Johnson account, adds Mr. Richard, “was profitable.”

The upshot: Never sign and return a happiness letter. Nor should you speak to your broker about it. Call the compliance officer or branch manager who sent the letter and politely insist on seeing the internal data that prompted it. Don’t discuss anything else or answer any questions seeking to establish how satisfied you are with your account’s performance.

Then bring the happiness letter, your account statements and the internal data (if you can get it) to someone who can give you an objective second opinion: an accountant, a registered investment adviser, a securities attorney, even a trusted family member or friend.

Chances are, something is happening that you need to put a stop to.


Source: The Wall Street Journal