You access your brokerage account and discover that some of your securities have been sold. Should you be concerned? If your broker sells stocks from your investment account without your authorization, these acts may be illegal. However, your broker most likely done nothing illegal. Instead, you may have been subjected to selling in an account where the broker had discretion to conduct transactions, or you could have had a margin account with enough losses to merit an unmet margin call.
In this section, we will go over both scenarios in which your broker has sold part of your investments.
- If a broker sells stock holdings from your brokerage account, there is usually a good reason for doing.
- Brokers may purchase and sell stocks in a discretionary account as they see appropriate, as long as the trades are consistent with your investing policy statement and risk tolerance.
- A brokerage firm may also sell stocks in your margin account automatically to meet an unfulfilled margin call.
Accounts with Discretion
A discretionary account (also known as a managed account) allows your broker or financial advisor to make trading choices on your behalf without your explicit authorization. Instead, the account owner will have signed documentation authorizing the broker to purchase and sell assets for your portfolio in accordance with an investment policy statement (IPS) that you have agreed to.
As a result, any trades performed by the broker must adhere to the guidelines outlined in the IPS or account contract, as well as fit with your risk tolerance and investment objectives.
What if You Disagree with a Discretionary Account Sale?
If you feel the broker’s activities did not comply with the IPS or guidelines outlined in your brokerage agreement, the first step should be to write a written statement to the broker’s company and their management outlining the facts of the incident. It’s conceivable that the broker and company were ignorant of the information and will handle them appropriately once they’re brought to their notice. You will also receive formal verification of your claim as a result of the correspondence. You should also make a complaint if the transactions were put in a non-discretionary account without the broker’s approval.
You can also call the Securities and Exchange Commission (SEC) and register a complaint for a more thorough investigation. If the firm and broker have not dealt with the problem satisfactorily or have not adequately explained the situation, the SEC may conduct additional investigations.
Brokers, portfolio managers, and financial counsellors owe a fiduciary obligation to their clients. It is a legal duty that they constantly operate in the best interests of their customers.
Calls for Margin
If you have a margin account, you may utilize leverage to boost the purchasing power of the money in your account. This implies you can acquire more securities than you can truly “afford,” with the difference coming from your broker in the shape of a loan.
If your leveraged long holdings begin to lose money and your margin equity level falls below the firm’s maintenance margin requirements, the brokerage has the authority to sell your shares without notifying you or gaining your approval. This is done to pay off the broker’s outstanding debt. Often, brokerage companies are not obligated to offer a formal notice of margin call, therefore if they do, it is done as a courtesy.
To prevent this problem, make sure you always have enough cash in your account to fulfil the maintenance margin, and that if it goes below, you swiftly send new funds in. You can also generating certain cash.
When Can a Broker Be Compelled to Sell Securities?
Your broker will explain out the criteria that will lead to a forced liquidation of your securities in the margin account agreement that you signed when you opened the account.
To guarantee that the broker receives the money (and interest) that you borrowed, they will sell your shares even if you lose money on the deals.
It is important to note that your broker may not utilize a certain technique when selecting equities to sell out of your account. Instead, the stocks that are sold to meet the whole gap in the equity level may be chosen in alphabetical order, for example. To top it all off, while selling such securities, the broker may charge the whole fee.
Note: A broker will only sell enough assets to fulfil the margin call, but if losses continue to accumulate, he or she may be obliged to sell again.
If you discover that your broker has sold stocks in your account without your specific consent, they have most likely done nothing improper. If you have allowed your broker discretion to trade for you, they may do so at their discretion as long as it meets your investment goals and risk profile and does not include unlawful or unethical practices such as churning (overtrading for the purpose of generating excess commissions).