The past decade brought unprecedented gains in the stock market. The daily reports of positive performance seemed like they would never end, and investors enjoyed years of monthly statements showing that their portfolios were doing well – very well.
The next month’s statement won’t show gains. In fact, nearly all investors can expect to see significant losses in their accounts. And those same investors may question why they see those losses. The news is bombarding the public with reports concerning why the markets are tumbling: COVID-19, oil prices, production in China, and so on. If the markets are falling, and everybody is losing money, it’s just the market’s fault for your losses, right?
Brokers Must Make Suitable Recommendations
Stockbrokers have an obligation to provide investment advice suitable for each client. That advice must take into account the client’s age, risk tolerance, investment objective, tax status, investment experience, investment time horizon, liquidity needs, and other factors unique to that client. Telling an investor who needs access to their savings to pay for college next year to put everything into an investment that won’t let them touch their money for five years is unsuitable.
Telling an investor who needs every last dime of savings to pay for retirement to place 100% of their portfolio in options is unsuitable. Concentrating a portfolio in a particular security, or asset class, without thoroughly discussing the risk associated with that concentration, is unsuitable.
We could go on, but you get the idea.
The broker’s suitability obligation extends beyond customer-specific factors. There are two other sorts of suitability the broker must respect. The first is called “reasonable basis suitability.”
In plain language, that means the broker must have used reasonable diligence to research and understand the investment so that he can form the opinion that the recommendation is suitable for at least some investors. Failing to research a “too good to be true” security, and thereby failing to understand it is actually a share in a Ponzi scheme, is a failure to abide by the reasonable basis suitability standard. All too often, brokers do not understand the securities they are selling and offer products that are “unsafe at any speed.”
The final type of suitability is “quantitative suitability.” Once again, that’s fancy language for the idea that trading too much in a client’s account is itself unsuitable. We often call that sort of trading – designed to enrich the broker without regard to the client – as churning. The trades are meant to generate significant commissions without regard to balancing those commissions against the client’s profits.
What Caused Your Losses?
We return to the question: what caused your losses? It’s entirely possible that the markets’ decline caused unavoidable losses in your account. But it’s also possible that your broker’s bad advice created a portfolio that was particularly and improperly sensitive to changes in the underlying markets. How can you tell what caused your particular losses? Talking with another broker or investment advisor may provide some insight. Similarly, consulting with an attorney who focuses on investor representation can help you understand what caused your losses.
If you’ve suffered substantial losses in your investment accounts and you’re not sure why, or if you suspect your broker or investment adviser may be to blame for the losses, please feel free to contact us or call Hugh Berkson at (866) 932 1295.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.