You Can Sue Your Financial Adviser for Bad Investments

With the increasing popularity of 401(k) plans and IRAs, many more of us have become investors — often without any background at all in finance. People owning such accounts must now decide how and where their contributions to these accounts are allocated.
To make better decisions, many of us are seeking the advice of financial advisers. Just like doctors and lawyers, these professionals are required to adhere closely to standards of professional conduct. When the actions (or inactions) of a financial adviser fall short of the “standard of care” for investment professionals, a client can sue for malpractice or fraud.

Investments Must Be Suitable

At the initial meeting, a financial adviser should ask many questions to determine your investment objectives, comfort level, net worth, risk tolerance and age.
The financial adviser is required to use this information to guide you to the types of investments that best suit your needs now and in the future, and to determine the amount of risk that you are comfortable with. An older person who plans to retire in a few years will have a much more conservative profile than a young person with no family obligations who is just beginning to invest.
To meet the test of “suitability,” your portfolio also must be properly diversified in a way that limits risk.

Other Aspects of Suitability

An investment can be unsuitable if the customer does not understand it. The “material risks” of any investment opportunity must be clearly explained by your adviser. An investment can be unsuitable if the financial adviser does not undertake the proper “due diligence” on a company, to make sure that its financials are strong, before recommending an investment.
One activity that novice investors should be on the lookout for is “churning.” This happens when there is an excessive amount of trading going on in your account. Some unscrupulous advisers engage in this practice to earn commissions and increase their own profits. Paying more than 5 percent of an account’s value in a year for commissions may be an indication of churning.

Working with a Financial Adviser

Advisers must disclose how they are paid for their services. This disclosure must identify whether the adviser bills clients or deducts fees from the clients’ accounts. It must also describe any other costs that the client may pay. Any additional compensation that the adviser receives from other sources, such as brokerage commissions, also must be identified.
A financial adviser must have your permission before investing your assets in any stocks, bonds or mutual funds.

Avoid Financial Fraud

When a financial adviser’s misconduct is intentional or reckless, the adviser may be liable for fraudulent misconduct. This happens when an adviser provides false information about an investment, omits important information about the investment, or tries to cheat someone by means of the investment.

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