From stocks and bonds to real estate, investment inevitably involves risk. Even a seemingly secure venture may lead to significant losses due to unexpected and uncontrollable economic factors. Unfortunately, as high-profile examples continue to demonstrate, in some cases, it is the negligence or misconduct of brokers themselves that leads to financial disaster.
According to the Financial Industry Regulatory Authority, in 2018 customers filed over 2,700 new claims related to investment mishandling. However, due to underreporting, that figure is likely much lower than the true number of potential violations. There exists a wide range of actions that brokers may take that could make them liable for investor losses.
Breach of fiduciary duty
In addition to having access to sensitive customer information and, often, direct access to client accounts, brokers work in a highly technical, complex and fast-paced industry. For this reason, federal law places financial advisers under strict obligation to act in their clients’ best interests. Brokers who take advantage of an investor for personal gain may violate this fundamental fiduciary duty.
Misrepresentation or omission of facts
Federal regulations also hold brokers accountable for misrepresenting investments, whether through purposeful distortion or omission of essential facts that may influence an investor’s decision. One of the most common examples of misrepresentation is downplaying or failing to disclose the extent of risk involved in an investment.
Recommending unsuitable investments
No two investors are alike. As licensed professionals, brokers must perform due diligence when recommending securities and other financial products. That means taking into account each client’s tolerance for risk, portfolio diversity, financial experience and overall investment objectives. An adviser who endorses opportunities that are unsuitable for a particular client, or simply unsuitable, may be in violation of federal regulations.
Excessive trading
Some brokers attempt to pad their own profits by engaging in frequent trading, allowing them to collect extra money through transaction fees or commissions. Known as “churning,” this practice is clearly not in the client’s best interest. Because it may be difficult for the average investor to determine whether a broker is engaging in excessive trading, individuals often turn to forensic experts who specialize in securities arbitration to make an informed analysis.