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Investment Advisor Misconduct

While the differences between a stock broker and an investment advisor are technical and extensive under the law, (the two types of professionals exist under completely separate regulatory systems), an investment advisor is a financial professional who gives investment advice for a fee, sometimes charged on an hourly basis, but usually charged on an annual percentage of assets under management. In contrast, stockbrokers generally charge commissions on a per-trade basis, although that changed for a while as brokerage firms tried to blur the distinctions between brokers and investment advisors. Investment advisors also usually have discretion to make investment decisions on behalf of their customers, while stockbrokers generally must obtain their customer’s approval before engaging in a trade. Because an investment advisor has discretion over the customer’s account, the advisor owes the customer the highest duty of loyalty and due care at all times. One final but important difference: investment advisors often can or must be sued in court, whereas claims against stockbrokers generally must be pursued in arbitration.

There are numerous ways in which an investment advisor can violate legal and ethical obligations to his or her customer, and most of these overlap with the types of misconduct committed by brokers. The most common types of investment advisor misconduct are:

Recommending Unsuitable Investments

A great investment for one person can be a very foolish investment for someone else. For that reason, an investor’s personal circumstances must be carefully considered by the investment adviser when he or she is recommending investments. A 40-year old unmarried surgeon should probably invest very differently from a middle-class parent planning for her kids’ college years. A 70-year old retiree on a pension should not invest in the same way as a wealthy 70-year old business owner who is still working. Advisors have the duty to ensure that each recommended investment is suitable for that customer in light of factors such as the customer’s age; financial status; investment knowledge and experience; short term and long term needs and objectives; and ability and willingness to tolerate risk and withstand loss. If you lose money in an unsuitable investment, the advisor is responsible. 

Misrepresenting or Omitting Facts

You need to know a lot of facts to intelligently decide whether to buy or sell an investment. Some advisors lie about things you need to know. Some advisors don’t necessarily lie, but they withhold certain facts that might affect your investment decision. And some advisors who misrepresent or omit facts are simply careless. But whether the advisor’s misrepresentation or omission is fraudulent or simply negligent, if it caused you to make a poor investment, the advisor may be liable for your loss.

Misappropriation and Other Criminal Activity

Occasionally, an investment advisor will engage in plainly criminal acts like theft, fraud, and forgery. In essence, the advisor hatches a scheme to steal your money. You have the right to seek recovery for any fraudulent conduct that results in misappropriation of funds by an advisor.


An investment advisor generally has the duty to diversify your account among different investments, investment classes, and industries. Proper diversification is one of the best ways to control risk and avoid excessive losses. If an advisor concentrates too much of your portfolio in one type of investment, (such as stocks), or puts too much of your money in only one or two different stocks, or buys too many stocks in the same industry, you face a much greater risk of suffering a large loss. For instance, millions of investors lost money beginning in early 2000 because their brokers had concentrated their accounts in high-flying technology stocks that plummeted en masse. An advisor who fails to create a properly diversified account can be liable for some or all of your losses.

WARNING: Deadlines apply to all of these rights of recovery. Delay can result in your claim being time-barred, or a particular forum may refuse to hear your complaints. But these deadlines are complicated. Don’t procrastinate in seeking qualified legal assistance. Likewise, don’t give up because you assume you’ve waited too long. Tony Hartman, Jay Salamon, and Hugh Berkson are lawyers who exclusively represent clients hurt by the misconduct of investment professionals such as stockbrokers. Ask us to look at your case. We’ll let you know how much time you have to proceed and what we can do to help you.

We spend nearly all of our professional time litigating investment disputes, exclusively representing investors injured by stockbrokers, investment advisors, insurance agents, and other investment professionals.
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