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How to Know if You Have a Case Against Your Brokerage Firm or Financial Advisor

Posted by attorney Ryan Smith

There is little question that the events in 2008 continue to have a profound effect on the securities markets. The major market indexes - the Dow Jones Industrial Average, S&P 500, NASDAQ, etc. - continue to be a fraction of what they were worth, which is reflected in investors' account values worldwide. This fact, coupled with the steady stream of recent news concerning Wall Street, has prompted investors to question whether someone or something is to blame for their losses. This article will help investors determine "Do I have a brokerage claim?"

Losing money in an investment does not, by itself, give rise to an actionable claim. Since the dawn of Wall Street, securities have had fluctuating values and provided investors with a wide range of potential returns. One has to look no further than the very recent past. In the last decade, investors saw the "dot-com" boom of the late 1990s, the subsequent "tech wreck" of the early 2000s and another bull market precede the current market downturn. Indeed, an actionable claim requires more than just losses; it generally must have at least one sales practice violation. Examples of sales practice violations include:

The financial advisor or the brokerage firm misrepresented the investment's potential benefits, risks or fees.

Financial advisors and their firms must provide their investors with a sound basis to evaluate the security or service under discussion. They cannot make any false, exaggerated, unwarranted or misleading statements or omit any material fact or qualification. As such, investors should consider the statements and materials they received concerning their investments and whether these contained incomplete, false or misleading information.

The financial advisor recommended an unsuitable investment.

Financial advisors must recommend investment products or services that are consistent with their investors' stated objectives, goals, risk tolerance and overall finances. That is, they must be suitable. Determining whether an investment was suitable is often a detailed, fact-specific inquiry, but, as a threshold question, investors should ask whether they understood their investment's potential benefits, risks and fees, and if so, if it appeared to correspond to the objectives and goals that they presented to their financial advisor.

The financial advisor or brokerage firm conducted an unauthorized transaction.

Unless granted the power to choose and purchase investments on their clients' behalf (known as discretionary authority), financial advisors must obtain their clients' approval before conducting each transaction. Investors should look for transactions in their account documentation that they did not ask their financial advisor to execute.

The financial advisor or brokerage firm failed to execute the client's instructions.

Failing to execute instructions - the opposite of conducting an unauthorized transaction - is also prohibited. Investors should review any notes or letters to determine whether their financial advisor or brokerage firm failed to execute any transactions they requested.

The financial advisor excessively traded the account.

Regardless of whether a transaction was authorized, financial advisors also have a duty to refrain from excessively trading their clients' accounts. Transaction costs - which are the fees and charges associated with each purchase or sale - can be significant and negate any investment gains or amplify any losses. Investors should be on the alert for account statements that show a considerable number of transactions or receiving numerous transaction confirmations in a short amount of time.

In addition, certain operational issues may give rise to an actionable claim. Examples of these include having difficulties transferring an account to or from a brokerage firm or experiencing issues receiving new securities as the result of a merger or some other corporate action. As with determining an investment's suitability, determining whether an operational issue is actionable is a fact-specific inquiry.

As with many professionals, the majority of financial advisors are honest, hard-working people who strive each day to help their clients. However, just as there are bad doctors, lawyers, plumbers, etc., there are financial advisors who have other objectives. Investors must be aware of their rights and be prepared to take action when their rights have been violated.


The Law Office of Ryan P. Smith, PLC offers this article for informational purposes only. It is not legal advice and its distribution is not an invitation for, and its receipt does not form, an attorney-client relationship. The reader should seek counsel in his or her home jurisdiction. © August 2009 The Law Office of Ryan P. Smith, PLC, all rights reserved.

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