One of the best ways to lose what you have worked so hard to put away for retirement is known as churning. That’s when a broker or financial advisor does unnecessary or unauthorized buying and selling in your account, or buys investments that pay him well but aren’t in your best interests.
I mention this now because this is the time of year when “happy letters” are sent out from brokerages and banks. What’s a happy letter? Believe me, it has nothing to do with being happy.
A happy letter is generated when the legal/compliance department at your brokerage or bank see what they consider unusual trading activity in your account. They send you a happy letter to inquire if you approve of how your account is being handled.
And believe me, this is not done to find out if you are happy. It is done in the hope you will sign the letter and return it to them, which means you are aware of what is going on, approve of it and keep them off the hook for any illegal activity.
You see, even though it is done all the time, it is illegal for anyone to buy or sell anything in your account without your permission. Or to buy anything that does not fit the risk tolerance you approved when you opened the account. And the company is legally on the hook for any losses or fees associated with this type of activity.
If you checked the box that said income or conservative investments, no one is supposed to buy you small cap or aggressive positions.
Understand?
And why do so many happy letters go out this time of year? Because brokers’ and advisors’ bonuses are based on activity during the calendar year. That ends on December 31.
Got it so far?
So, if you receive one of these happy letters there is a very good reason you did. If you can’t find the activity in your account that triggered the letter, get some help from your accountant or from someone who has a better understanding of the business.
You can try to call your broker or his manager and ask why it was sent. You can even call the compliance department and ask them. But I wouldn’t hold your breath waiting for them to respond.
Chances are very good they won’t be much help.
A happy letter means the compliance department at your brokerage has a problem with what they are seeing. If they have a problem with it, there’s a very good chance you have a problem.
Don’t just sign this letter and return it. It could be nothing, but there’s a very good chance it is a something.
Know your rights and protect what you have!