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Bad advisers don't just hurt the rich

You might not have lost money to Bernie Madoff or in Jon Corzine's failed company, MF Global, but small investors can get burned by investment advisers just as easily as the megarich, Consumer Reports Money Adviser warns.

Consider these recent examples: An arbitration panel slapped Merrill Lynch with damages of about $880,000 for putting a client in her 80s into an all-stock portfolio. Raymond James Financial Services had to pay an arbitration award of nearly $1.8 million to an 87-year-old client after the firm took the client's $3.5 million out of bond funds and put it into variable annuities and a variable life insurance policy.

To protect yourself against such chicanery, here are some steps Consumer Reports Money Adviser recommends you take:

*Be on watch for possible signs of fraud: Large numbers of trades, unexpected fees or a mysterious drop in your portfolio's value are some of the most obvious signs that you're being fleeced. "Churning" occurs when a broker makes successive trades in your account to generate fees. Common signs of churning are frequent trading in a single stock or trading of mutual funds, bonds or other non-equity holdings that are typically meant to be held long-term. Some of the most abused products include variable annuities, private or unlisted real estate investment trusts and other alternative investments. Be cautious if you've never heard of a type of investment and it's not listed on an exchange or anywhere else you can look it up and track it.

*Gather relevant documents: Collect all your monthly statements and any other correspondence, including email, you've had with your broker or adviser. Review statements for inconsistencies and unusual fluctuations in the value of your investments. If you have an independent financial adviser, check that your statements are sent from a third-party custodian and are not prepared by him or her.

You'll also need to find the contract you signed when you opened the account and any other papers describing the adviser's services. You may have signed a limited power of attorney giving your adviser authority to make trades in your account and withdraw fees. Check the effective dates of the contracts; for some investments, such as annuities and insurance products, there is a 30-day look-back period during which you can cancel.

*Determine what is actionable: Losing money isn't itself a cause for action against your broker. You need to show that your losses were the result of inappropriate behavior or a disregard for your stated preferences, or that the investments recommended were unsuitable.

If you're defrauded by your stockbroker or your brokerage goes under, the Securities Investor Protection Corp. will cover up to $500,000 worth of missing securities, including up to $250,000 in cash. Many brokerages have additional coverage.

Some financial products fall outside those protections. Variable annuities are insurance products, which are not covered by the SIPC or the FDIC.

*Figure out where to file a complaint: If you think you've been victimized, your first step should be to contact your adviser or broker in case there's been an honest mistake. If you don't get satisfaction, Consumer Reports Money Adviser recommends talking with a branch manager or compliance officer at your adviser's company, and send a letter explaining your concerns. You can also hire a lawyer to write a letter to the firm detailing your complaint.

*Consider mediation or arbitration: If all the parties agree, you can take your case to mediation -- an informal, nonbinding process in which an impartial mediator helps you and the company find a mutually acceptable solution to the dispute. Mediation can be faster and less expensive than arbitration or litigation, according to the Financial Industry Regulatory Authority, which provides both arbitration and mediation services.

You'll probably want to have a lawyer represent you. On average, arbitration takes about a year, and clients win about half the cases.

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By the editors of Consumer Reports at www.consumerreports.org.