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Protecting Your Investments

Troubles at large and smaller brokerage firms – from allegations of misappropriation of funds to bankruptcies – are leaving more investors with questions – and concerns – about the safety of their assets.

“There’s a big difference between doing business with a national or regional brokerage firm and a smaller one,” said Mark Maddox, founder of Maddox, Hargett & Caruso, P.C. in a Nov. 23 Wall Street Journal article. Maddox, an Indianapolis-based lawyer, has represented investors in arbitrations against both small and large brokerage firms.

Larger brokerages such as UBS or Morgan Stanley Wealth Management or online firms such as Fidelity Investments and Charles Schwab are often thought of as more secure and less likely to fail, experts say.

But, as the WSJ article points out, some investors prefer the homegrown touch of smaller brokerage firms to their bigger counterparts. To ensure their money stays safe, investors should consider several factors, according to the article.

Among those considerations: Choose the right type of account. A cash account compared to a margin account is safer. It’s also important to check the Broker Check Web site of the Financial Industry Regulatory Authority (FINRA) to view the history of regulatory actions or civil proceedings against a firm or broker.

In addition, research the firm’s reputation and balance sheet.

“If a firm is thinly capitalized, you want to stay away from it,” Maddox said in the Wall Street Journal article. Case in point: Hudson Valley Capital Management. Earlier this month, the New York-based firm was expelled from the securities industry after its chief executive allegedly used customer assets to cover up losses he sustained while day trading. As of Sept. 30, 2011, Hudson Valley Capital had only about $80,000 in assets.

Maddox also advises asking the brokerage firm if it has professional liability insurance. If it does, and it commits malpractice that costs clients money, they will be able to recover what is owed to them. Maddox recommends asking for a copy of the declaration page of the policy that summarizes the firm’s coverage.

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