Customer Investor Disputes
Stein & Stein, P.A., Attorneys & Counselors, represents individual investors in claims for investment and market related losses as listed below.
Unlike when you purchase a car or a new suit, a financial advisor recommending the purchase of securities has a requirement to recommend to you only investments, which are suitable for you, based upon your account objectives, your risk tolerance, your sophistication, and numerous other factors. Much like your fingerprint, a person’s financial objectives are unique. For example, if you are an individual who wants to accept risk for the potential of a greater return, then your investments should be quite different than that of a retiree who seeks capital preservation.
Financial advisors are required by the SEC, FINRA, state statutes, administrative regulations, and the brokerage firms to know their clients. This requirement is key to investing because without that knowledge, financial advisors cannot make suitable investment recommendations. If the financial advisors do not make suitable recommendations, your investments may be subject to more risk then you are willing to tolerate. When losses occur, your lifestyle, ability to retire, and sense of security could be irreplaceably damaged.
To determine your suitability, the financial advisors and financial institutions must first determine your account objectives. These objectives can range from speculation to capital preservation. Your risk tolerance can range from not being risk adverse, in which all your capital and/or investments are constantly at risk, to where you are totally risk-averse and cannot or do not want to risk losing any capital. If your financial advisor did not invest your assets pursuant to your account objectives and risk tolerance, you may be able to recover your losses.
Over-Concentration/Failure To Diversify
Most investors have heard of the saying, “Do not put all of your eggs in one basket.” The problem is that most investors rely upon financial advisors to make that determination. When the financial advisor fails to recommend that the investor diversify the account, the client is subject to much more risk of loss and much more volatility. Not only can the individual investment be over-concentrated, but the types of sectors of public securities can be over-concentrated and even the types of investment classes can be over-concentrated. Diversification is a key requirement to protecting clients’ assets.
Some clients who have large positions of stocks do not want to diversify their holdings. When this occurs, the clients should be advised by their financial advisor of the risks associated with over-concentration and strategies to limit the risk of holding concentrated positions. There are many ways of protecting concentrated positions with either little cost and/or by paying a relatively small premium. Some of these strategies include hedging, protective puts, stock collars, exchange funds, and pre-paid forward sales.
Breach Of Fiduciary Duties
Financial advisors and stock brokerage firms owe their clients numerous fiduciary duties, including, but not limited to following industry guidelines, best execution, acting in a non-negligent manner, and complying with rules of fair practice.
Failure To Supervise
Securities brokerage firms have a duty to properly engage, train, and supervise the actions of its financial advisors. When the brokerage firm fails in these activities, that failure can cause significant losses to its client.
When a financial advisor makes a material misrepresentation or omission of fact about an investment strategy or an individual investment, the firm and advisor may be responsible for the investment losses. Each financial advisor has a responsibility to make sure that the information conveyed to their clients regarding the investment is accurate and complete.
In a non-discretionary account, a financial advisor is limited to the authority allowed to him/her by the client. If the advisor exceeds that authority by placing a trade without the client’s authority or failing to place a trade ordered by the client, then the financial advisor has violated industry standards and rules. If this occurs, the advisor will be held liable for the loses caused by their actions.
When an advisor excessively trades securities in an account for the purpose of generating commissions, he/she has violated industry standards and rules. Even if the account is not a commission account, but a fee-based account, the advisor can still excessively trade the account, which is a negligent action.
Use of margin in a brokerage account magnifies the potential profit and the potential loss. It increases volatility of the account and can actually lead to the account having a negative balance, in which the client owes the brokerage firm money. Therefore, the use of margin should only be used when the client is fully aware of all the risks. When the advisor fails to notify the client of the risks, the advisor may be liable.
Option trading strategies require that the client be sophisticated and in certain circumstances able to accept significant loses in the account.
Other Financial Products
The securities industry is continually generating new financial products. Recent problems have occurred with many of these products and investors must be aware of the risks of such products.