What are the Most Common Reasons Financial Advisors Are Sued?

What are the Most Common Reasons Financial Advisors Are Sued?

May 8, 2020 | Blog

In the financial world, investment losses occur daily and financial advisors often fail to live up to their professional duties. As we know, every investor is unique as are his or her objectives. For example, you might have a high-risk tolerance, while someone else has a low tolerance for risk. These require completely different investment strategies. A financial advisor’s job is to provide investment advice and recommendations that are the best fit for your objectives. But what happens when they don’t? What happens when the investment itself doesn’t line up with your investment objectives and risk tolerance? In this article, I want to share with you the most common reasons financial advisors are sued. While every situation is different, these items below are indicators that you have a promising claim against your financial advisor. 

Common Reasons Financial Advisors Are Sued 

Financial Advisor Negligence

Financial advisor negligence refers to a scenario where your financial advisor doesn’t act in a manner to reasonably protect you from financial risk or harm. For example, if your financial advisor has made investment recommendations outside of your stated risk tolerance or investment objectives, chances are that you can sue for negligence. In order to determine financial advisor negligence we look for evidence proved on a balance of probabilities with three basic requirements: Duty of care, Breach of duty and Causation. You can learn more about Financial Advisor Negligence here

Breach of Fiduciary Duty

A financial advisor may have a fiduciary relationship with you depending on their licenses and certification. If your financial advisor has a fiduciary obligation, and has engaged in any type of fraud that benefits him or herself at the expense of your investments, it can be deemed a breach of fiduciary duty. The first step we would take is to determine if your financial advisor has a fiduciary obligation by looking him or her up on the FINRA website. Then we would review your portfolio and look for indicators of breach of fiduciary duty including commingling of assets, conflicts of interest and incomplete records. You can learn more about Breach of Fiduciary Duty here. 

Suitability

FINRA’s suitability rule states that financial advisors must deal fairly with their clients, including seeking information about the client and their investment portfolio before making recommendations. With that said, if your financial advisor has recommended investment products or strategies that are a poor match for your stated objectives, you are likely to have a possible claim against him/her. To help dictate this, we would first review your portfolio and look for trading inconsistent with your stated objectives. Thereafter, we would see if there were demonstrably better alternatives than what was recommended to you. You can learn more about Suitability here

Overconcentration 

It commonly occurs that financial advisors invest an inappropriate amount of a client’s assets into a singular type of investment product. This phenomenon is referred to as overconcentration. So, if your financial advisor has failed to diversify your portfolio and invested you much too heavily into one security or sector or security type, chances are that you can recover your losses legally. When reviewing your documents, we would look for unnecessary volatility or losses caused by having too much of your portfolio invested in one particular security, product, asset class, geography etc. You can learn more about overconcentration here

Investment Fraud

Another common reason why your financial advisor could be sued is because of investment fraud. This is a broad term that refers to any deception or scheme related to an investment drafter to take your funds. Some examples of this might be Pyramid schemes, Ponzi schemes , or Advance Fee Fraud. You can learn more about general investment fraud here

Misrepresentation 

One of your financial advisor’s obligations is to provide you all the detailed facts related to your investments. If these are ignored or not provided, and your portfolio took a turn for the worse as a result of poor/missing information, you possibly have a cause of action. As an investor, you may experience investment losses. However, if these are due to your financial advisor acting in a reckless manner, he or she has failed to represent you. Learn more about misrepresentation here.

Churning / Excessive Trading 

When a financial advisor completes a large number of trades in your account to generate commissions, this illegal practice is referred to as churning. This is prohibited by federal and state laws, and FINRA rules, so if you have noticed any signs of excessive or repetitive trades, you may be able to take some legal action. In order to determine if your financial advisor has been “churning” your portfolio, we would look at your account statements for things like overly frequent trades, switching of mutual funds or annuities, and declining account value in upward moving markets. You can learn more about churning here

Reverse Churning

Reverse churning, on the other hand, refers to the instance of a financial advisor placing your money into a fee-based advisory account while performing very little actual management, resulting in losses (as a result of the lack of management). If your advisor has offered little to no on-going advice while you were invested, you can consider taking legal action. To detect a case of reverse churning we would look for signs of inactive advisors, double dipping, inappropriate enrollment in fee based advisory accounts. You can learn more about reverse churning here

Private Placement 

At times, financial advisors may push you to invest in private placement investments; investments that involve high risk and result in large commissions for the financial advisor. These types of investments can be harder to understand and have less information available than publicly available securities. They might be more appropriate for the more experienced investor as there is no guarantee that your money has been lent to a creditworthy, collateralized borrower. If you have seen losses as a result of a situation like this, you might have a legal case against your advisor. You can learn more about private placements here

Unauthorized Trading 

A financial advisor makes important decisions regarding your investment portfolios. As part of their professional duty, however, the financial advisor is responsible for obtaining your approval on every transaction before proceeding. Failure to do so would be considered unauthorized trading. For example, if you notice the activity of a bought or sold security in your account without any knowledge of personally approving that trade, your financial advisor might have breached his or her professional duty. You can learn more about unauthorized trading here

Failure to Supervise 

A firm has a legal duty to supervise its financial advisors to ensure that your financial decisions comply with FINRA, state, and federal laws. If they are negligent and fail to do so, you can file a claim for their violation of obligation. Failure to supervise claims can come in a variety of forms including: failure to effectively monitor the communications of individual advisors, lack of sufficient reviews and inspections and failure to put appropriate written supervisory procedures in place. You can learn more about the failure to supervise here

The descriptions above represent the most common reasons financial advisors ore sued. If you are concerned this might have happened to you, you should speak to an attorney with expertise on the matter. I have dedicated my career to helping individuals who have experienced significant losses and been taken advantage of by their financial advisor. Since the laws and regulations that apply to financial advisors are complex, I always recommend consulting with an expert if you are unsure as to whether you are a victim of misconduct or fraud. If you would like to talk to me about losses you have incurred, or any other concerns you may have, please contact me at 1-855-463-9859 or investoradvocates@kasslaw.com for a free consultation. You can also request a free case evaluation by sending us a message through our secure contact form.

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Author: Matthew Schwartz

Matthew Schwartz is a Shareholder at Kass Shuler, P.A. where he serves as the practice group leader for their securities litigation and professional negligence practice group. His practice is focused on plaintiff-side securities arbitration and litigation, representing individual investors and institutions in claims against brokerage firms, investment advisors, commodities firms, hedge funds and others. He also represents plaintiffs who have been damaged by their insurance agents, lawyers, accountants and other professionals. He is an accomplished commercial litigator who has handled a variety of business disputes and other consumer claims.