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Smart and prudent investors rely on their financial advisors for the best investment recommendations. Nevertheless, advisors in these circumstances cannot recommend investments that their clients don’t understand.
Imagine that a 50-year-old doctor goes to an investment advisor with the objective of “speculative growth.” The advisor starts trading puts and calls based on future price expectations; however, the doctor has never traded options before and he doesn’t fully understand the risks involved. As he watches his account value rise and fall drastically from month to month, he doesn’t know what his broker is doing or why.
To his horror, the doctor watched his $300,000 account dwindle to a value of $10,000 in a matter of months. Was the stockbroker in the wrong? If the doctor never traded options before, the broker might be at fault.

Graph 36929 1280 1Two Legal Standards that Apply to This Example

The stockbroker in the above example might have violated federal securities laws. A potential claim for damages might rely on the following general rules:

  • Suitable investments: Investment advisors have a fiduciary obligation to recommend suitable investments that match their client’s situation and needs.
  • Disclosure of “Material Facts”: When recommending an investment, an advisor must ensure that his or her client understands all “material facts” pertaining to the investment. “Material facts” are facts that would cause the client to reconsider his or her decision to invest. This notion applies to the risks involved. If the client cannot fully appreciate the risks due to his or her experience and education, the broker should not recommend the investment.

In summary: Brokers must recommend suitable investments, and the investments cannot be over their clients’ heads.

Customer Wins $400K Arbitration Because Investments Were Too Complicated

Irresponsible investment advisors break the above legal standards all the time. In one recent Financial Industry Regulatory Authority (FINRA) arbitration over similar violations, a customer received an award of $404,482 because his broker invested him into stock options that he didn’t fully understand.
In the case, a customer of Allegis Investment Services requested that his stockbroker invest his retirement savings for the future. The customer agreed to risk 25 percent of his portfolio on a risky options trading strategy, but no more. According to the FINRA panel, the investment advisor breached the legal obligations owed to the customer. FINRA awarded the customer $270,452 of compensatory damages, $53,730 of interest, costs, and fees of $80,300.

Did Your Broker Recommend Investments You Didn’t Understand?

If your investment account suffered financial losses that surprised you, it’s possible that your broker recommended investments you didn’t fully understand – and your advisor might have broken the law. Contact us. We will evaluate your situation and advise you of your legal rights and options.

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