Broker Fraud & Securities Fraud Attorney
Broker Fraud – Unsuitability
An investment broker must recommend investments based on a client’s individual financial needs. However, brokers may be pressured by their firms to push a certain stock, or may have a personal interest in a corporation or other investment opportunity. A broker is guilty of unsuitability if they advise their client to invest in stocks that they know are outside the client’s risk tolerance or are not suited to meet the client’s financial goals.
In making an investment recommendation to a client, a broker must make recommendations that are consistent with the customer’s risk tolerance, financial condition, time horizon, liquidity needs, and investment objectives. A broker has a duty to know his client and only recommend investments and trading strategies that are suitable for that client. An investment may be unsuitable if a customer does not have the financial ability to incur the risk associated with a particular investment, if the investment was not in line with the investor’s investment objectives or if the customer did not know or understand risks associated with certain investments.
A broker has a duty to gather essential information in order to understand the risk tolerance of an investor, the tax considerations for the client, the client’s prior experiences and appetite for risk, and the level of return desired. It is the duty of a broker to make recommendations that are appropriate and suitable given his client’s circumstances. If a broker breaches those duties and makes unsuitable recommendations for a client, the broker is liable to that client.
The issue is not whether a broker picked the right stock, anyone can make a mistake, but whether the broker pick the right type of investment. Example: bonds and lower risk stocks for a retirement account rather than high risk stocks only.
A broker must also have a “reasonable basis for the recommendation”. The broker’s basis for the recommendation can be the firm’s research, in which case the firm must have a reasonable basis for its own recommendation.
A situation where an investment strategy does not meet the objectives and means of an investor. In most parts of the world, financial professionals have a duty to take steps that ensure that an investment is suitable for a client. For example, in the United States these rules are enforced by the NASD.
‘Unsuitable’ Explanation from Investopedia
No investment (other than outright scams) are inherently suitable or unsuitable; suitability depends on the investor’s situation. For example, for a 95-year-old widow living on fixed income, speculative investments such as options and futures, penny stocks, etc are extremely unsuitable because the widow has a low risk tolerance. On the other hand, an executive with significant net worth and investing experience might be comfortable taking on those speculative investments as part of his or her portfolio.
What Is Unsuitability?
Binding the special relationship between broker and investor is something called a fiduciary duty. This is a duty for one party to treat the other party’s best interest as his or her own (and, by implication, to put that best interest before self-interest). That’s why, in securities misconduct cases, you will often see “breach of fiduciary” as well as “unsuitability” listed among a broker’s alleged offense. At any rate, this fiduciary duty informs situations of unsuitability, where, for one reason or another, a broker fails to act in his or her client’s best interest by recommending inappropriate investments. When these investments succeed, it’s called blind luck. When they fail, it’s called negligence, and chances are the broker will find himself before a FINRA arbitration panel.
How Unsuitability Happens
The key to unsuitability is understanding that each and every investor is different. Accordingly, when a brokerage firm does intake of a new client or transfer client, they conduct an application process that provides them with the investor’s vitals. These include age, employment, investment experience, portfolio size, risk tolerance, investment objectives, and all kinds of other information about the investor. This helps shape what in the business we generally call the investor’s profile: a snapshot of who he or she is and what they’re trying to achieve by investing. Now, once the investor’s profile has been created, it is the broker job and it’s their duty to put together a portfolio that reflects your profile and preferences, in strict accordance with suitability principles and fiduciary duty. When a broker fails to do this, either deliberately or through ignorance, we call the investments in the investor’s account unsuitable.
Unsuitability Means At Any and All times
One other thing to know about unsuitability is that according to FINRA, an investor’s account must contain investments appropriate them at all times. That means that broker can’t just create a portfolio for you when you sign up and then forget about you for twenty years. They have to stay in touch with both the investor and the account, or risk allowing that account to descend into unsuitable. After all, investments are part of a dynamic, ever-changing stock market. Even when individual companies or product do not change, their industry or context might. At all times also means that if an investor’s profile or life situation changes over time, his portfolio should reflect those changes. Avoiding situations of unsuitability means maintaining harmony between the investor and his or her investments. It’s not an easy job. Which, coming full circle now, is the reason why unsuitability plays such a major role in so many of our securities litigation cases.
If you suffered losses as the result of an investment in which you believe your broker had an undisclosed conflict of interest, you need the assistance of a law firm nationally recognized for its professional excellence. With years of combined legal experience, and having successfully represented thousands of individual and institutional investors, the Law Offices of John Lawrence Allen – your broker fraud and securities fraud attorneys – have the expertise, experience and resources necessary to review, investigate and aggressively pursue your claim of undisclosed conflict of interest.
We have won over a hundred million dollars in losses for clients nationwide, from Los Angeles to New York City. For assistance with your undisclosed conflict of interest claim, call us or complete our online claim evaluation form for a free broker fraud and securities fraud case evaluation