I am a senior citizen and have suffered major losses to the tune of $100,000 in the recent stock market turmoil. Can I sue my financial adviser? I understand the dynamics of the market as far as its ups and downs, and have ridden them out before.
However, it’s been different with the market in this timeframe insofar as tech stocks are taking a major hit, as well as others. I advised my financial adviser I was heading into retirement months before all of this happened.
As my account was taking losses, she did nothing to warn me that given the current situation it might be a good idea to move my assets to another area to lessen the losses — and return at a later date when things have stabilized.
I now find out through other advisers I’ve consulted with there is a term called “stop loss” to do just that, stop the loss. They also mentioned she did fail in her duties as an adviser. She never explained anything, like high- or low-risk management, or any other aspect of the market.
The only time we had contact was when I contacted her about buying into different stocks. Other than that, she never called about anything concerning my account at any time. Can I sue and, if so, how do I go about doing it?
Feeling Like a Sucker
There are a lot of hurdles you would need to clear in order to have a legal case to sue your financial adviser and, from what you’ve said here, it does not look like they have been met. Any investment has an element of risk and the S&P 500 SPX,
Last year, you would have been on the pig’s back, and consequently been a big fan of your financial adviser’s strategy. But no adviser is perfect. And no one — despite previous predictions — can predict the market. Even Warren Buffett, the Oracle of Omaha, makes mistakes. And he will acknowledge them when he does. That applies to your financial adviser — and your good self.
But back to your question of suing your adviser. You would first need to prove that you entered into a fiduciary relationship with her. That is, she pledged to put your interests before hers and that she breached her fiduciary duty. You would also have to prove a direct link between her actions and your losses, and show that those losses could have been foreseen.
The Financial Industry Regulatory Authority has rules to help ensure the protection of investors. Read more here. The Gibbs Law Group specifies the difference between outright fraud, misconduct and negligence, and gives some examples of the latter, including unsuitable investments, failure to disclose important information and over-concentration of investments.
A good adviser should understand your circumstances “and recommend only suitable financial products for your age, investment objectives, experience and desired level of risk,” the law firm writes in a blog on the subject. “But negligent advisors will sometimes steer you toward risky or unsuitable investments to obtain higher commissions.”
Diversity helps protect investors against excessive losses, but does not prevent them. “Investment over-concentration is when a financial or investment adviser fails to diversify a customer’s portfolio, subjecting this customer to excessive risk of loss,” it adds. Your losses may be across a wide range of stocks, as the overall market has taken a dive in 2022.
A good adviser
Morey Stettner, a columnist for MarketWatch, told me it’s standard practice for advisers to document their communication with clients for compliance. Typically, advisers conduct client-review meetings periodically. “The adviser typically drafts an ‘investment policy statement’ that covers the goals of the investment strategy — and the client signs off on it and that’s documented,” he said.
“If a fiduciary breaches their fiduciary duty, that would trigger regulatory action against that adviser,” he added. “In any case, not checking in with client at least once a year to assess his risk tolerance and ask about his investment goals, time horizon, retirement planning, etc., is negligent. Just not sure that’s grounds for a lawsuit.” (On BrokerCheck, complaints are typically listed under an adviser’s name.)
You may also misunderstand the concept of a “stop loss” and how such an order comes about. That is an order made by the investor, perhaps in consultation with his or her broker, to sell a stock if it falls to a certain level. But while that can stop the bleeding in your portfolio, it could also lead you to sell too many stocks at a lower price, without waiting for a potential rebound.
There will be a paper trail, but it does not seem likely that your adviser can be sued for not reaching out to you as often as you might like, even in a turbulent market such as this. Sometimes, the best action is no action. You lost $100,000. We don’t know if that’s 100% or 10% of your overall portfolio. Generally, as you near retirement your investments should be more conservative.
Either way, don’t expect your day in court. Most investment contracts include an arbitration clause. Finra, and the Securities Industry and Financial Markets Association (Sifma), a trade group representing securities firms, banks and asset managers, argue that arbitration saves all parties valuable time and money, and helps facilitate smaller claims from retail investors.
Obviously, if you were to consult a lawyer, you would need to present more detail. From your letter, however, it seems you are upset about your paper losses, and your adviser is taking the blame. But notwithstanding the conditions for suing your adviser as laid above, there are two people in this relationship, and in many cases the responsibility works both ways.
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