Bill and his wife, Jane, (not their real names), were a well-educated couple looking to boost their returns. After attending one broker's seminar, Bill was impressed by, his expertise in company analysis and stop-loss protection.



They decided to put Jane's retirement money into this broker's hands. But after signing the paperwork to open the account, the broker never contacted Jane to find out how she wanted her money managed. Both sides made assumptions about what the other wanted and/or would do.

Jane and Bill were busy, and so was Jane's IRA. We don't know how long it took or how the account did early on, but eventually, over 90% of Jane's retirement money went down the tubes.

The broker promised stop-loss protection but never actually put that strategy in place. The broker determined Jane's risk tolerance without any input from her. When that section of the application was left blank, the broker filled it in it himself so that it, according to Bill, would justify his stock picking and mutual fund selection.

Bill and Jane had to go through arbitration in an attempt to recover their losses, as are almost all brokerage firm clients. After a process that typically takes several years, the panel agreed that the broker had violated 26 NASD regulations. These included lying, the use of erroneous information, total mismanagement of client's accounts and the use of unsuitable investments.

When it was all over, guess who the panel found at fault for Jane's losses?

Jane, of course! They reasoned that since she was a well-educated woman, with a Master's degree no less, that she should have known better than to let it happen. Her husband Bill was even chastised for finding the broker in the first place, and for putting her in a position to lose her money. "We were supposed to know better, not the broker, or his broker-dealer. I am not making this up. My wife got a check for less than 1% of the account value before the losses occurred."

Bill's experience with arbitration is fairly typical. Roughly 50% of arbitration cases are won by the investor, but the award is often a fraction of the damages. Moreover, many times the complaint doesn't even show on the broker's record.

This story has many lessons. Perhaps the most important one is that you bear the primary responsibility for managing your investments. The financial system isn't out to protect the individual investor. Even if you suffer great financial loss, don't expect the system to bail you out.

Bill's story also illustrates the need for investors to have transparent communication with their advisor. If you don't like the investments being used or if you aren't comfortable with the portfolio allocation then let the advisor know.

Don't just assume that your account is doing fine. Watch your monthly statements. Track your portfolio's value. If the value starts to decline significantly and you aren't assured the advisor is taking action to protect it, then find out why. If you don't like the advisor's response, then take your account elsewhere.

Also keep in mind that you won't know if any advisor is right for you until after you've worked with him/her for about a year. If you find yourself laying awake at night worried about your money, though, it's a sure sign that something is wrong.

The bottom line: it's better to prevent significant losses from occurring in the first place instead of trying to recover them through arbitration later. Determine the risk you are willing to assume. If your account value drops to that level then demand that action be taken. You are the boss.

The buck stops with you. You can delegate the day-to-day management and investment selection to a trusted advisor, but it is your responsibility to manage that relationship. Think of yourself as a business owner. If you didn't like the job an employee was doing you'd fire him/her. Take the same approach with your advisor. Remember, it's YOUR money.