Often, investors assume that because investments inherently carry a degree of risk, that you are precluded from seeking to recover investment losses. This is incorrect. While normal market fluctuations should be expected and are not actionable, the manner in which your portfolio is positioned is actionable.
The securities laws, both at the state and federal level, offer protections to investors. Moreover, the Financial Industry Regulatory Authority (FINRA) has promulgated rules that govern registered financial advisors. The securities laws and FINRA rules provide the contours of the investment relationship with a customer like you. If the financial advisor deviates from the rules, they and their employing brokerage firm may be liable for any investment losses experienced by the customer.
How does it all work . . . you ask? Financial advisors are obligated to only recommend suitable investments.
Making suitable investment recommendations is the cornerstone of proper investment advice. All brokerage firms and financial advisors have a duty to recommend suitable investments that are consistent with the needs and objectives of the investor. Brokerage firms and financial advisors must learn all material facts about an investor before making any recommendations and must match all investments with a customer’s stated investment profile. Failure to recommend suitable investments may result in a claim to recover attenuating investment losses.
FINRA has defined the standards in which investment recommendations made by brokerage firms and registered financial advisors are evaluated. The FINRA suitability rule focuses on three fundamental concepts: (1) reasonable basis suitability, (2) quantitative suitability and (3) customer-specific suitability.
Reasonable basis suitability requires that a recommended investment or investment strategy be suitable or appropriate for at least some investors. Reasonable basis suitability requires an advisor to conduct adequate due diligence so that they can determine the risks and rewards of the investment or investment strategy.
Quantitative suitability requires a brokerage firm or financial advisor with actual or de facto control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions – even if suitable when viewed in isolation – is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile. No single test defines excessive activity, but factors such as the turnover rate, the cost-equity ratio and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.
Customer-specific suitability requires that a member or associated person have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile. Among the criteria that a financial advisor must evaluate to satisfy their customer-specific suitability obligations include the investor’s:
- Age
- Other investments
- Financial situation and needs
- Tax status
- Investment objectives
- Time horizon
- Liquidity needs
- Risk tolerance
- Any other information disclosed by the customer
Failure by a financial advisor to adhere to these requirements is evidence of negligence or, worse, investment fraud. If you as the investor can establish, at a minimum, negligent misconduct, you may be entitled to recovery your investment losses.
The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at 800.931.8452 or by email at mwolper@wolperlawfirm.com.
Attorney Matthew Wolper
Matt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks.
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