How Do You Know When A Securities Financial Advisor is Breaching His or Her Duties to a Client?

by Adam T. Rabin

Customers at securities brokerage firms often assume a financial advisor will invest the client’s assets in a manner that is safe and in the client’s best interests. But what many clients do not know is that they may be exposing their accounts to unnecessary risk or even abuse. Whether through intentional misconduct, negligence, or inadequate supervision, the mismanagement of customer investment accounts can lead to unwarranted financial losses.

A Financial Advisor’s Duties to His or Her Clients

A financial advisor owes the following duties, among others, to his or her clients:

  • to recommend only suitable investments;
  • to put the client’s interests above the advisor’s;
  • to disclose and not misrepresent all material facts about the recommended investments; and
  • to buy or sell securities only after receiving the client’s consent.

An advisor’s failure to comply with these duties may have serious financial consequences for the client.

The Advisor’s Duty to Recommend Only Suitable Investments

The “Know Your Customer” rule (Rule 405 of the New York Stock Exchange) and the “Suitability” rule (Rule 2310 of the National Association of Securities Dealers) require a broker to learn certain “essential facts” about a client before recommending an investment. This information includes the client’s age, income, net worth, investment experience, risk tolerance, and investment objectives (the “investor profile”). A broker has a duty to recommend only investments that are consistent with the client's investor profile. Recommendations that are inconsistent with the client’s investor profile are considered unsuitable.

An Advisor is Required to Put the Client’s Interests Above the Advisor’s

“Churning” occurs when a broker makes trades for the primary purpose of generating commissions. Repeated securities purchases and sales within a short period of time, i.e., turnover of securities, are indicia of churning. The commissions charged for these trades can make it difficult for the client to profit in his or her account because the commissions will impinge upon any increase in asset value.

The Advisor Must Disclose All Material Facts About Recommended Investments

Advisors are required to provide accurate information about recommended investments. Securities laws prohibit brokers from misrepresenting or omitting material information when recommending an investment to a client. Information is “material” if a reasonable investor would consider it important in making an investment decision. Misrepresentations and omissions frequently involve inadequate disclosure of risk.

An Advisor is Required to Obtain Client Consent to Purchase or Sell Securities

An advisor is required to obtain the client’s consent before purchasing or selling a security on behalf of the client. Brokerage firms require a client to provide the broker with written trading authority to waive this requirement. Even a written agreement that provides trading discretion to an advisor, however, does not obviate an advisor’s duty to purchase only suitable investments for the client.

When a Client Believes an Advisor Has Breached His or Her Duties

If a review of the client’s account statements or other documents shows a possible breach of duty, the client should contact the advisor for an explanation. If the client is not satisfied with the response, the client should address the issue with a manager or a compliance officer. The firm should remedy the problem immediately.

When clients believe that they have been taken advantage of, they often are inclined to try to recover their investment losses on their own. This often proves unsuccessful. Brokerage firms have skilled attorneys (in-house and outside) who may deny any wrongdoing. And in the limited circumstances where a brokerage firm will offer money to settle a dispute, the offer usually is inadequate to remedy the losses.

If a client believes that an advisor has breached his or her duties to the client, the client should seek the advice of a lawyer who has expertise in the area of securities arbitration. Many lawyers handle these cases on a contingency fee and will offer a free client consultation.

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Adam T. Rabin is a shareholder with McCabe Rabin, P.A., where he practices in the areas of plaintiff-side securities arbitration and business litigation.

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