Maybe. Every investment has some risk. With the present volatility in financial markets, losses are, unfortunately, common. However, some losses may not be attributable to the market alone. Occasionally, the blame falls on financial professionals. This article covers two of the more common claims brought against financial professionals and where these claims must be brought.
A fiduciary relationship exists in a broker-customer relationship. A broker must manage customer accounts as dictated by the investor's needs and objectives, inform the investor of risks in particular investments, refrain from self-dealing, follow order instructions, disclose any self-interest, stay abreast of market changes, and explain strategies. The primary legal theory for liability of stock brokers is a breach of this duty. Two of the more common ways financial professionals breach this duty are placing clients in unsuitable investments, and churning.
Before recommending a security, a stock broker must have a reasonable basis for believing that the transaction is suitable for the customer. There are two parts to this analysis: 1) determine whether the product is suitable for any customer, and 2) determine whether the product is suitable for a specific customer. A typical example of an unsuitable investment would be placing a 90-year-old retiree on fixed income into high risk tech stocks.
Churning occurs when a broker engages in excessive buying and selling of securities in a customer's account chiefly to generate commissions that benefit the broker. In churning cases, the entire assets of the investor are often traded once or more a month. Commissions paid on each trade can destroy the value of an investment account in a very short period of time.
The overwhelming majority of claims investors have against their stock brokers are adjudicated through the FINRA arbitration process, rather than in civil court. This is because the agreements investors sign to open a securities account provide that FINRA arbitration is the exclusive means by which disputes arising under the agreements are decided.
FINRA is the acronym for the Financial Industry Regulatory Authority. FINRA has established rules for brokers and their brokerage firms that set forth standards of conduct. Those rules require, among other things, that brokers get to know their customers, including their financial status, investment objectives, and risk tolerance, and to recommend only those investments which are consistent with their client's profile.
If you believe that you might have been the victim of broker or investment advisor misconduct, you should consult with a qualified attorney as soon as possible. Each state and Congress has adopted statutes of limitations, which set forth the time periods that you have to assert a claim. If you wait too long to assert your claim, it may be barred.
FINRA arbitration proceedings offer a unique set of challenges for aggrieved investors. Many claim that the deck is stacked in the stock broker's favor in most FINRA arbitration proceedings. However, our firm has had success in recovering investment losses. At Hance Law Firm, we welcome inquiries regarding your rights relative to recovering investment losses due to a broker's misconduct and we always strive to provide the best possible guidance.