Stockbrokers Told These 2 Clients NO, for Their Own Good
Good brokers know their clients well, watching for warning signs and behavior that is out of character.


Some time ago, a reader contacted me, upset with her stockbroker for not following her instructions to purchase a large number of shares in a company with significant losses due to COVID-19. The share price had plunged, and she wanted to take advantage.
She acknowledged seldom making stock investments; rather she typically just parked retirement funds in the brokerage’s money market account and CDs.
I received permission to speak with her family and the broker, and my initial impression was that there must have been some reason for the broker to reject the “buy” instruction, likely a suspicion of dementia or another form of diminished mental capacity.
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“That was my fear,” her broker said. “This behavior was so out of character that I felt a legal duty to not do as she wanted, rather, to check with family and see if she was in her right mind, which she was not.”
The family thanked me for alerting them. The company that the woman wanted to buy into, by the way, filed for bankruptcy not long afterward.
A conservator was appointed by the courts, and the client’s ability to do anything beyond shopping for food and basic necessities was taken away.
She was protected from herself, all due to a concerned stockbroker who was worried about her. He said he “felt so sad this was happening, as she had been a client of our firm for over 30 years, and to see this sudden decline really hurt.”
The duty to say “No” helped that client in this instance, however there are other times when no matter what the stockbroker says, a client will exhibit poor judgment and continue on to make a bad investment, as you will see.
Look for Things Out of Character, Like Chasing Hot Tips
“Over time,” points out Bakersfield-based Douglas Payne, a financial adviser with Morgan Stanley and a friend of this column, “you get to understand your client’s investment habits and what types of risks they are willing to take. Sometimes advisers can refuse when clients suggest investing in something that we feel is not in their best interest. And poor decision-making often comes from more than just diminished capacity. Overly aggressive speculation can also be a reason to refuse an order.
“But both situations are difficult for financial advisers to manage, because you are refusing to do what your client wants, and that can strain relationships,” Payne said.
For example, a client called him wanting to buy 10,000 shares of a penny stock, which was not an investment that would have been considered appropriate for him. Payne inquired as to where he had gotten the idea, and the client said that he was sitting at lunch with a friend who told him about the small company.
“What was the friend’s level of expertise?” Payne asked.
“Oh, he is in the same industry,” the client said. “It was a small drilling company in Texas that he knows about.”
Payne then asked if the client had heard about the company before, but he had not. “He said he trusted the friend’s judgment about it and asked me to place the order. I did place the order, because he was adamant, and the amount was a small fraction of his net worth. But if the potential loss would have affected his lifestyle, I would have refused to do it.
“About 18 months later that company went bankrupt, and the client lost the entire investment of about $30,000. This was not a substantial loss for this client but was clearly an example of poor judgment, overaggressive speculation.
“People are susceptible to suggestions when it comes to investment returns, wanting to believe there is something that their friends might know that nobody else does and they will be able to capitalize on that information.”
Payne described another example of poor judgment involving a Chinese cellular tower investment that a client brought to him. The client said that his son had a friend who had been approached to make an early-stage investment in a cell tower company in a province of China. Payne asked the client if it were such an attractive deal, why would the company be needing financing from investors in Central California?
The client replied that he did not know but that the son’s friend had done extensive due diligence, including flying to China to investigate the opportunity.
“This still does not make sense,” Payne told his client. But the client nevertheless wired funds from his investment account, despite Payne’s objection.
Several months later the client returned to Payne, explaining that he thought the investment might be in trouble. The son’s friend was having trouble with his contact, and it was looking like a fraudulent situation. “I probably am not getting my money back!” he told Payne. “I should have listened to you!” He wound up losing over $25,000.
“More people make poor decisions based on speculation — following the so-called hot tip — than on diminished capacity, in my experience,” Payne said. “But both situations are difficult for advisers. When someone calls, requesting something completely out of character, an adviser needs to explore what led their client to want that specific investment, especially today, with an aging population where Alzheimer’s and dementia are more and more common.”
Investment Professionals Becoming Proactive
Investment professionals are becoming proactive where mental capacity is a concern. It starts with asking questions, Payne said.
“We might ask if they recall what their investments are, what the portfolio was designed to do to begin with, and if they are able to remember the reasons why we embarked on a certain strategy.
“Next, we look for and ask them about unexplained withdrawals that don’t align with the client’s prior activity, for first-time wire transfers — especially to a foreign country — and for changes in beneficiary designations. Are they confused about account activity or balances?
“Do they have difficulty with simple tasks, such as signing client account documents, speaking or gathering clear thoughts? Has there been a change in personality or mood swings? Finally, on a physical level, we look for declines in physical care and hygiene, despite having money.”
Add a ‘Trusted Contact’ to Your Account
As of February 2018, the SEC requires all brokerage houses to suggest adding a “trusted contact” to each account. This person does not have a power of attorney, but having them named gives investment professionals another contact besides the client to be able to call and discuss any concerns if they suspect a decline in mental health or financial abuse. (For more ideas on how to protect your accounts, or those of a family member, from fraud, please read Watch Out for the Elder Fraud Web.)
Payne concluded our interview by urging anyone at risk, especially elderly clients, “to have their attorney, CPA or other family members start to attend meetings. More eyes on their personal situation are better.”
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After attending Loyola University School of Law, H. Dennis Beaver joined California's Kern County District Attorney's Office, where he established a Consumer Fraud section. He is in the general practice of law and writes a syndicated newspaper column, "You and the Law." Through his column, he offers readers in need of down-to-earth advice his help free of charge. "I know it sounds corny, but I just love to be able to use my education and experience to help, simply to help. When a reader contacts me, it is a gift."
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