When an investment or portfolio goes shockingly wrong, fear and embarrassment often will cause investors to wait much longer than they should before confronting their stockbrokers, says Hugh D. Berkson, a Principal at McCarthy, Lebit, Crystal & Liffman.
“When brokerage customers enter into an investment, they do so with feelings of optimism and hope,” Berkson says. “If the investment’s value later plummets, the customer’s natural tendency is to accept a trusted broker’s recommendation to stay the course and to believe the broker’s assurances that things will eventually turn around.”
Certainly, there are instances where patience does pay off and investments do recover. But that’s not always the case.
“An investor’s inquiry into possible misconduct or malpractice by his or her broker often starts with a simple question: What happened to my money?” Berkson says. “The typical response from the broker is to advise continued patience or to blame a loss on ‘market conditions,’ but eventually, the investor justifiably becomes suspicious. At that point, it’s a good idea to have someone else look at your portfolio.”
Smart Business spoke with Berkson about the options available to investors when an investment doesn’t work out.
How do you know if your broker has acted inappropriately?
Investment brokers aren’t required to be infallible or even very good, but they all have an obligation to select and recommend investments that are suitable for each particular investor. Brokers also must take many factors into consideration as they craft an investment plan, including the investor’s age, investment objective, risk tolerance, income and tax status.
If your broker recommends a suitable investment that just doesn’t work out, there’s no liability. Your loss is simply part of the risk you take when you make an investment. But you might not know whether your loss was caused by your broker’s misconduct unless you meet with a qualified investment lawyer.
That lawyer can help determine whether the investments were suitable, whether the broker had a hidden financial incentive for selling them or whether the broker was simply stealing. The good news is that your broker and his or her brokerage firm can be made to compensate you for some or all of your losses if you’ve been a victim of these types of behaviors.
What are some common acts of wrongdoing by brokers?
The most common, by far, is the recommendation of unsuitable investments or investment strategies. Brokers also sometimes misrepresent or fail to disclose important facts. They may sell unauthorized investments, trade excessively to increase their commissions, trade without their customer’s authorization or fail to adequately diversify a customer’s holdings.
And very occasionally, brokers engage in Ponzi schemes and other types of fraud or theft. Of late, many brokers also are selling high-commission investments they claim to be very safe, but actually are complex, risky and illiquid products in which the customer can lose every penny invested.
What can an injured investor do to recover?
Brokerage firms are primarily regulated by the Financial Industry Regulatory Authority (FINRA). Stockbrokers can be held accountable for their wrongdoing through FINRA arbitration.
Obviously, a favorable result can’t be guaranteed, but FINRA arbitration makes it possible for brokerage customers to recover some or all of their money. The advantages of going through arbitration are that the case is private, so your name is not made public.
It’s also faster and cheaper than court and there are no costly and time-consuming depositions, except under rare circumstances. If your case doesn’t settle, it will be decided by a panel of three arbitrators. However, as in the court system, most cases are resolved through settlement, in which case a hearing is avoided. The decision about whether to accept a monetary settlement or go to a hearing always belongs to the client, though lawyers will advise the clients on the pros and cons of each option.
If you have lost money at the hands of a bad broker, you shouldn’t be embarrassed. Talk to a lawyer. You do have options to attempt to recover what was lost. ●
Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman
