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Breach of Fiduciary Duty
Fiduciary Duty is a legal obligation of one party to act in the best financial interest of another – to place another’s interests first – to make the client’s interests paramount. When a person, such as a Financial Advisor or Stockbroker, agrees to act in a fiduciary capacity, they are obligated to act in a manner that puts the client’s interests first. The law forbids the Stockbroker from acting in any manner adverse or contrary to the client’s interests, including acting for his own benefit when it is contrary to the client’s best interests. Clients are entitled to the best efforts of the fiduciary and the fiduciary must exercise all the skill, care and diligence at his/her disposal when acting on the client’s behalf.
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Unsuitability
FINRA’s suitability rule states that firms and their associated persons “must have a reasonable basis to believe” that a transaction or investment strategy involving a recommended security is suitable for the customer. This reasonable belief must be based on a detailed customer profile that includes information on investor age, other investments held by the investor, the investor’s investment objectives, liquidity needs and risk tolerance.A detailed customer profile should also include the investor’s financial status, tax status, and investment experience.
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Failure to Diversify
Failure to diversify means that a Stockbroker or Financial Advisor fails to recommend an appropriate allocation of one’s assets into different investment asset classes. A properly diversified portfolio may include a mixture of different products, such as stocks, bonds, mutual funds, and/or money market accounts spread over multiple sectors. A Financial Advisor is obligated to ensure that one’s investment objectives and risk tolerance are recognized and fulfilled.
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Churning
Churning, in its most basic form, occurs when a stockbroker/financial advisor buys and sells securities for and account, without regard for the customer’s investment interests, for the purpose of generating commissions. Churning can involve almost any kind of security ─ stocks, options, bonds, mutual funds or variable annuities. It is an unethical and illegal practice that violates both federal and state law.
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Unregistered Stockbrokers and Unregistered Sales Assistants
By law, stockbrokers and certain sales assistants must be registered with FINRA and with state regulators. If they fail to meet this requirement, an investor may have the right to cancel a purchase or sale.
Sales assistants, by the nature of their position, are often not registered. This means, effectively, that they are very limited in what they are permitted to do. If a sales assistant is poorly supervised, that person may “cross the line” and perform tasks that only a registered person is permitted to perform. In such situations, a brokerage firm may by law be required, at an investor’s request, to reverse a purchase or sale.
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Unregistered Securities
Most stocks, bonds and notes can not be offered for sale to the public, unless they are first registered with the Securities and Exchange Commission and/or a state regulator. Any security that does not have an effective registration statement on file with the Securities and Exchange Commission is considered “unregistered.” To sell (or attempt to sell) a non-exempt security before it is registered may even be considered a felony.
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Concentrated Positions
If you have a large percentage of your assets invested in a single stock or bond, a small number of stocks or bonds, or even a single sector of stocks or bonds , then you have a concentrated position. Concentrated positions expose the investor to significantly greater risk than a well diversified portfolio. Even a 10% concentration of assets in a single stock, bond, or sector may be considered an excessive concentration.
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Negligence
Negligence occurs when a financial advisor or stockbroker breaches a general duty of care resulting in damages.Just like the victim of an auto accident may be entitled to sue the driver who was at fault, the victim of a stockbroker’s negligence may also be entitled to seek relief.
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Unauthorized Trading
Unauthorized trading is the purchase or sale of securities that a Financial Advisor or Stockbroker makes for a customer without the customer’s permission. The Financial Industry Regulatory Authority (FINRA) has a specific rule that prohibits any Financial Advisor or Stockbroker from making unauthorized securities trades without prior approval from the customer.
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Breach of Contract
When an investor has an oral or written contract with a financial advisor or stockbroker, and that person breaches their contractual obligations, they may be financially responsible for the breach.
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Breach of Third Party Contract
In certain situations, you may be a third-party beneficiary of a brokerage firm’s contract with a regulator, such as FINRA. The third-party beneficiary, i.e. the customer, is not a party to the contract itself. However, the customer may be the intended beneficiary of the contract, and may therefore have legal rights under that contract. The customer may have legal rights to enforce the contract, or otherwise benefit from the contract. In order for firms such as Morgan Stanley, Merrill Lynch, Raymond James, UBS Financial Services or Charles Schwab to be licensed with FINRA, those firms must agree to comply with FINRA’s rules and regulations. You, the investor, may be the beneficiary of those rules and regulations.
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Failure to Follow Instructions
As a fundamental element of their relationship with the customer, Stockbrokers/Financial Advisors, as well as registered sales assistants, are required to follow the customer’s instructions. They may be liable if they fail to do so. As an example, if a customer tells a broker to sell something today, they are required to do it. They cannot delay for any reason. On the flip side, if a customer tells a broker to buy something today, the order must be placed. While these are very basic examples, it should go without saying that a broker/advisor is required to do what they are told.
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