Most of us aren’t financial experts. When we invest in the stock market, we rely on an expert (like a financial adviser) to guide us and make decisions in our best interests. This often works out well, such as in a bull market, when investments perform at or above expectations.
But sometimes, things don’t go so well, and we lose a lot of money. That may just be due to an economic downturn or the inherent risk of investing in the market. In these situations, it is important to ask your financial adviser what went wrong — and for them to give you a clear, straightforward answer.
If your financial adviser responds by telling you that “everyone” lost money, don’t settle for that answer. Even if the stock market took a nosedive (such as in response to the coronavirus pandemic), it simply isn’t ever true that “everyone” lost money. Whether a particular investor loses money in a bad market, and how much they lost, depends on the type of investments that they had and how their money was distributed among those investments.
Even in a bad market, it is still possible for an investor to earn a profit. Markets go up and down, but the decisions made by a financial adviser influence whether their clients lose money, and how much they lose. If your financial adviser gave you bad advice or violated the rules that govern the profession, then there may be something else at play — and you may be able to recover all or part of your investment losses from your broker.
The Role of a Financial Advisor
A financial adviser who buys and sells securities (individual stocks, bonds, mutual funds, and certain other investment products) may be referred to as a broker or a registered representative. Generally, these advisers must be registered with the Securities and Exchange Commission (SEC) and be members of the Financial Industry Regulatory Authority (FINRA).
Brokers execute trades on behalf of their customers or clients. They are invariably paid for the trades they place on a client’s behalf. As part of their services, brokers may make recommendations about specific investments, such as stocks, bonds, or mutual funds.
The broker’s most important job is to make choices and recommendations based on many factors unique to you. Those factors include things like your age, education, and investment experience; your income and savings; your long and short term needs and financial goals; your willingness to place some or all of your money at risk; and your ability to withstand a loss that might result from that risk. In performing this job, your financial advisor is supposed to use all of this information to recommend investments and allocations that were suitable for you.
The duty that a financial professional, such as a broker or an investment adviser, owes to their clients may vary significantly based on their specific title. This can be confusing, as many brokers hold themselves out as financial advisers, and give advice on investments.
Under current federal law, investment advisers owe a fiduciary duty to their clients. This means that investment advisers must act in the interests of their clients and that they cannot put their own interests ahead of their clients’ interests. The SEC recently imposed a new standard for brokers commonly called “Regulation Best Interest (“B.I.”). The rule is new, extensive, and not yet tested in courtrooms or arbitration rooms. But the fundamental idea is that the broker must put their client’s interest before their own. Before Reg B.I. was imposed, FINRA had a rule requiring that the broker’s investment recommendations be suitable for their customer. FINRA has stated that it understands Reg BI to be a stronger standard than the former suitability rule.
While these legal standards are different, it is important to remember that financial professionals are governed by specific rules and regulations when it comes to the advice that they give to clients or customers. If a broker or an investment adviser recommends that an investor make a particular investment that isn’t suitable for their needs, or which benefits them more than the customer, it may be a violation of the law and industry practice.
How a Broker’s Advice Can Lead to Investment Losses
Every investment carries a certain degree of risk, whether you are purchasing real estate, index funds, penny stocks, or exchange-traded funds (ETFs). If you’re managing your own money as a day trader a day trader, you are using your own judgment to determine what risks are acceptable, and dealing with the potential losses associated with day trading. But if you are paying a broker to advise you about suitable investments, then you are entitled to answers about what went wrong if you lose money.
As described above, brokers are required to take a range of factors into consideration when making choices and recommendations about investments. Even if they do their job correctly, it is still possible to lose money, particularly in a bear market. But if you suffer a devastating loss while working with a broker, then they may well be to blame.
Even if you aren’t an expert in personal finance, there are a number of questions that you can ask yourself to help figure out whether your adviser may be at fault for your losses:
- Did you lose money even though your broker said that you wouldn’t?
- Did you tell your broker that your risk tolerance was low, and yet you still lost money?
- Did you lose way more money than your broker said that you could lose (or more than you could afford to lose)?
- Were you honestly shocked by what happened with your investments?
If the answer to any of these questions is yes, then your broker may be at least partially responsible for your losses. They might have failed to gather the right information about you, picked the wrong kinds of investments, or even engaged in dishonesty or fraud.
It is all too easy for an adviser to tell a client that NASDAQ or the Dow Jones is down, or that there was a stock market crash and everyone lost money. These things may be true — but if your brokerage account was wiped out, then there is probably something more going on than a drop in stock prices.
Your broker has an obligation to pick investments that are in your best interests, and that are suitable for you and your particular situation. If you suffered a major financial loss while working with a broker, you should not simply accept their claim that everyone got burned. Dig deeper to find out what really happened — either on your own or with the assistance of an experienced securities fraud attorney.
Ready to Learn More? We Can Help.
You don’t have to be a Wall Street tycoon to know that something isn’t quite right when you suffer major losses when working with a broker. Even in a financial crisis, your investments should be set up in a way that doesn’t lead to this type of loss. When people lose money in the stock market, that may be due to the luck of the draw — or because their broker gave them bad advice.
At McCarthy, Lebit, Crystal & Liffman, we represent investors who have been wronged by their advisers and brokers. For more than 20 years, our law firm has advocated for people just like you, helping them recover compensation from their brokers. To learn more or to schedule a consultation with a member of our team, contact us online, or call us at 1-866-932-1295.