When a "Happiness Letter" Is Not Cause for Celebration


One of our favorite financial columnists, Jason Zweig of the Wall Street Journal, wrote this piece warning clients of brokerage firms to beware of "happiness letters". Even though we thought we knew pretty much everything there is to know about brokerage firm practices, Zweig taught us something new. According to Zweig, a happiness letter is sent out when "the firm's internal monitoring software has detected activity that could be harmful to a client and could lead to arbitration claims or regulatory penalties. Lawyers and former brokers say the mailings tend to be considerably more common in the fourth quarter, when brokers are driven to hit commission targets and their managers are trying to earn bonuses."

The goal of these letters is to elicit a positive response from the client in order to absolve the firm of any future liability. Industry insiders refer to them as "CYA" letters. They always begin with a friendly tone thanking the client for his business. Next, they state that a periodic, routine review of the account indicated detection of "concentrated positions", an acceleration of "trading velocity", or an increase in the "cost-to-equity ratio". As Zweig explains, "In plain English, your broker has put a potentially dangerous amount of your money into a single asset or is trading your holdings much faster than usual, or you are incurring unusually large commissions."

So what should a brokerage client do if he or she gets one of these letters? Zweig's advice is unequivocal: "Immediately search your account for signs of activity that seem inappropriate or counter to your instructions to your broker." The last thing the client should do is to make the mistake of signing it and mailing it back. According to Susan Axelrod of the Financial Industry Regulatory Authority (FINRA), "It is critical that investors review the information in a happiness letter to ensure that the account is being run in accordance with their wishes." Ignoring or discarding the letter is also not a good idea because the firm could interpret that as a tacit endorsement of their conduct.

Zweig takes it one step further when he says that rather than talking to your broker about it, you should call the compliance officer or branch manager and politely insist on seeing the internal data that prompted it. If you can get that data, then bring it along with the happiness letter and your account statements to a trusted expert and ask for an opinion.

If you are a brokerage client and have recently received a happiness letter, Index Fund Advisors would be happy to assist you to the best of our ability in our capacity as a fiduciary. If your broker is not obligated to act as your fiduciary, then you should not be surprised if he directs you into high-cost investments or churns your account. Please note that by no means are we saying that all brokers engage in this behavior. If you would like to learn more about the benefits of working with a true investment fiduciary, please feel free to call us at 888-643-3133.