Can I Sue My Financial Advisor?

If you’re losing money from your accounts, having trouble getting in touch with your broker, and are worried your investments are not in safe hands, you might be burning with the question: can I sue my financial advisor? 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 subject to regulation and can be actionable when mismanaged.

A bad financial investment can cost you money, time, and stress, and drain your confidence for future opportunities. It can affect your overall financial portfolio as well as your possibilities for providing for your loved ones. At Wolper Law Firm, we represent clients who have been deceived, misled, or otherwise whose best interests have been neglected by trusted professionals. If you need help pursuing justice for bad financial investment advice, contact our investment loss attorneys to see how we can help.

What Does a Financial Advisor Do?

Financial advisors are trained professionals who assist their clients with creating and implementing specialized financial plans, managing their investment portfolios, and pursuing their financial goals. Because each person’s financial goal can vary, there are different kinds of advisors, such as:

  • Brokers and broker-dealers, who buy and sell stocks, bonds, and mutual funds
  • Certified financial planners, who have passed an exam from the CFP board and are held to rigorous standards
  • Investment advisors, who are registered through the Financial Industry Regulatory Authority (FINRA)
  • Portfolio and asset managers, who are typically registered as investment advisors as well with FINRA
  • Financial coaches and consultants, who can provide financial literacy advice but are not always regulated or certified by a professional licensing board

FINRA Financial Advisor: Duties

A financial advisor who is registered with FINRA has certain legal obligations to ensure they are acting in your best interest. When they neglect these duties, your advisor can be held accountable for fraud.

Examples of duties of FINRA financial advisors are:

  • Duty to ensure that the asset or product is suitable: A financial advisor must recommend investments that meet both the objectives and means of each investor. Investments that do not match this standard can be deemed “unsuitable” for the client, and financial advisors who recommend them can be held accountable.
  • Duty to conduct due diligence: Financial advisors must properly vet investment opportunities, and examine them for evidence of risk, fraud, or illegitimacy. Financial advisors must also perform a level of due diligence when working with clients, such as inquiring about their objectives, financial situation, risk tolerance, and more. This will enable qualified financial advisors to appropriately flag unsuitable transactions.
  • Duty to make recommendations consistent with the client’s goals and risk appetite: FINRA Rule 2111 states: “A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.” Examples include their age, tax status, investment objectives, other investments, financial debts and needs, investment experience, liquidity needs, risk tolerance, and more. For instance, an older single person who lives off of their investments may have a much lower risk tolerance than a younger married couple who is looking to create a long-term strategy.
  • Duty to promptly communicate all material information: Financial advisors must properly communicate all important information with their clients who have entrusted them with their financial well-being. Being unable to reach your financial advisor, or filing a complaint that you never hear a follow-up about, is not a good sign of an adept advisor.

What is Suitability?

Financial professionals, like brokers or investment advisors, should follow the suitability standard when recommending investments to their clients. Suitability means asking, “Is this investment appropriate for my client?” If the answer is no for any reason, because of factors like age, risk aversion, investment goals, portfolio spread, or more, then the investment will be deemed unsuitable.

Sometimes, an investment may be unsuitable because it largely profits the broker. If an investment entails the broker receiving a higher commission or fee while enhancing your risk or failing to meet your goals, then it is likely to be unsuitable. Suitability requires the client’s needs and interests to be put before the broker’s.

Suitability is sometimes explained as the “sleep test”. If a client cannot sleep at night because of excessive worry surrounding their investments, then the investment recommendation is not suitable for their interests.

Suitability vs. Fiduciary

A fiduciary duty is the legal and ethical obligation to act in another party’s best interests. Fiduciary actions include disclosing conflicts of interest, acting loyally and in good faith, executing their role with maximum efficiency, and maintaining confidentiality. For example, a financial advisor is expected to follow prudent investment practices while keeping the client’s overall financial situation in mind.

Suitability is a similar understanding of acting in a client’s best interests, but it comes with a lower burden of care. Financial advisors, like broker-dealers who work on commission, have a suitability obligation to their clients. On the other hand, fiduciaries like registered investment advisors are generally held to a higher standard of care. The suitability standard focuses on whether an investment is appropriate for the client, whereas fiduciaries are obligated to provide advice that prioritizes their client’s best interests.

How Does FINRA Help Investors?

Securities laws, both at the state and federal level, offer protections to investors. FINRA has promulgated rules that govern registered financial advisors. It defines the standards by which investment recommendations made by brokerage firms and registered financial advisors are evaluated. 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.

The FINRA suitability rule focuses on three fundamental concepts: (1) reasonable basis suitability, (2) quantitative suitability and (3) customer-specific suitability.

Reasonable Basis Suitability

Reasonable basis suitability requires that a recommended investment or investment strategy be suitable or appropriate for at least some investors. Accordingly, an advisor should conduct adequate due diligence to determine the risks and rewards of the investment or investment strategy. They should also have a well-informed basis to believe that the recommended investment product or strategy aligns with the client’s financial goals, risk appetite, and overall financial goals.

Quantitative Suitability

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

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

Making suitable investment recommendations is the cornerstone of proper investment advice. 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. Such failure 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 of your investment losses.

Warning Signs of a Bad Financial Advisor

Among the many warning signs, financial advisors with past backgrounds of felony convictions or charges, fraud allegations, or unsuitable investment allegations are not worth the risk, no matter what they promise. You can look up financial advisors registered with FINRA using the BrokerCheck service to ensure their qualifications are accurate.

Here are some of the warning signs of a bad financial advisor:

  • Breach of fiduciary duty: Breach of fiduciary duty is subject to civil damages as well as in some cases criminal charges. Breach of fiduciary duty might involve fraud, embezzlement, self-dealing, misappropriation of assets, inadequate record-keeping or reporting, negligence, or failure to distribute assets.
  • Failure to conduct reasonable due diligence: A broker-dealer can violate the reasonable due diligence standard by failing to read or request audits, failing to request information that can help them understand what will be suitable for their client, or failing to have a reasonable basis to believe that their recommendation is in the best interest of their client.
  • Unsuitable financial recommendations: Unsuitable financial recommendations can put a portfolio at risk, turn a client away from future investments, enrich a broker at the expense of their client’s interests, or lose the client’s money in ways that should not have occurred. A financial recommendation is unsuitable when it is not consistent with suitability standards around a client’s interests, age, tax status, and more.
  • Investment over-concentration or failure to diversify: Ideally, when one stock drops in value, it should not have an overwhelming effect on the entire portfolio. However, a portfolio that is over-concentrated or over-invested in one area or company may see enormous and inappropriate fluctuations that could have been prevented with proper diversification.
  • Excessive portfolio turnover: Churning is the excessive trading of assets in a client’s brokerage account, usually done in order to generate the illusion of activity and brokerage commissions. Churning is illegal, and brokers who engage in it may be fined in a successful FINRA arbitration claim. Even flat-fee accounts can be subject to “reverse churning” (conducting too little trading in exchange for a cut of the assets).
  • Making unauthorized trades: A fiduciary figure must ask for your approval before trading your investments. Unauthorized trades occur when a registered financial advisor manages your assets summarily, without asking for approval or communicating with you before making trades.
  • Insider trading: Insider trading is an illegal activity that occurs when those with inside information (often broker-dealers, financial advisors, and other securities professionals) act on inside information in order to enrich their own best interests. An example might be a financial advisor who receives a tip that a certain share price is likely to plummet, and sells their stocks before the drop.

How to Sue Your Financial Advisor

Suing financial advisors is never a step taken lightly. However, financial advisor negligence, churning, unsuitable investment advice, and other similar acts are all grounds to file a FINRA complaint and sue your financial advisor. Before doing so, we recommend undertaking the following actions:

  • Check if your financial advisor is registered with FINRA: Financial advisors who are not registered do not owe their clients the same legal obligations for suitability and other duties. You should look into your financial advisor’s past background, including any similar allegations.
  • Gather all relevant information and documents: You will need access to all relevant documentation about your accounts, investments, and assets, as well as your broker’s information, emails, voicemails, text messages, and more. It is important to be able to provide written evidence of what was communicated to you and when.
  • Prepare to file a claim with FINRA: Before filing a claim with FINRA, make a complaint in writing with your firm. Keep copies of all correspondence with your broker(s) or other financial advisors. Once you have done so, you may escalate the complaint to FINRA for federal investigation.
  • Consult with an experienced financial fraud attorney: An experienced financial fraud attorney can help you with all of the above steps, as well as with recovering your financial losses, safeguarding future investments, and representing your best interests in the FINRA arbitration.

I Want to Sue My Financial Advisor: How Can Wolper Law Firm Help?

The Wolper Law Firm, P.A. represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Simply put, our expert securities litigation attorneys will be by your side every step of the way when suing your financial advisor.

We offer initial case evaluations to assess the strengths and weaknesses of your case, collect relevant documentation, and begin to build the presentation of your claim. Our expert securities litigation lawyers determine the correct forum for filing your claim and act in your best interests to arbitrate whenever possible. Our team has extensive experience in representing our clients aggressively and effectively, with a meticulous approach to detail that has won us accolades from our clients and hundreds of thousands of dollars on their behalf.

The FINRA arbitration process has much in common with a trial, and working with a trial lawyer with experience in securities litigation and securities arbitration can make a world of difference in a potential lawsuit. Matt Wolper, the Managing Principal of the Wolper Law Firm, P.A., 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.

Can I Sue My Financial Advisor: FAQs

The following are some frequently asked questions related to suing your financial advisor:

1. What is an unsuitable investment?

An unsuitable investment is one that does not match a client’s needs or interests. Unsuitability is determined by a slew of factors such as a client’s investment goals, needs, risk tolerance, age, tax status, financial literacy, experience, and more.

2. Who is a customer under the suitability rule?

According to FINRA Notice 12-55, a customer is any person who opens a brokerage account or purchases a security for which the broker-dealer will be compensated. FINRA Rule 0160 excludes other brokers or dealers from coverage under the suitability rule.

3. Can you sue a financial advisor for bad advice?

Under certain circumstances, yes. Financial advisors are obligated to only recommend suitable investments to their clients. If the advice a registered financial advisor gives you is unsuitable for your needs, or if they have failed to perform due diligence, you can sue for negligence.

4. Can you sue someone for a bad investment?

Yes. Under certain circumstances, such as Ponzi schemes, pump and dump schemes, false information, or unsuitable advice from financial advisors, you can sue for the losses that you incur from a bad investment. However, not every loss is actionable, so it is a good idea to speak to an investment fraud attorney who can give you the right advice.

5. Can you sue a financial advisor for negligence?

Yes. Financial advisors are governed by FINRA and have an ethical responsibility to ensure that their financial advice is suitable for their clients. If your financial advisor has engaged in misconduct or negligence that has caused you harm, and you are unable to resolve the issue through alternative methods, you may need to sue them to recover your financial losses.

6. How do I sue a brokerage firm?

To sue a brokerage firm, you will need evidence that their actions were negligent. Brokers who fail to follow directives, provide incorrect advice, or who do not adhere to industry standards may be held liable for damages. Before you sue a brokerage firm, make sure you have documentation of their actions.

Working with a FINRA arbitration attorney can ensure that your case proceeds within the appropriate jurisdiction and that your chance of a recovery is maximized.

7. What are the sanctions for churning?

Churning is a serious offense that can be difficult to prove without the help of an investment loss attorney. Sanctions for churning can range from $5,000 to $116,000 under FINRA guidelines. FINRA may also impose a suspension of up to two years, or even bar a broker indefinitely.

8. What is FINRA arbitration?

FINRA arbitration is an alternative to a courtroom trial. Under FINRA arbitration, your financial fraud attorney will present your claim under the primary regulatory body for resolving securities disputes. A case typically takes 12 – 16 months, after which the decision (called an arbitration award) is put in writing and sent to the parties.

Let Us Help You: Contact an Investment Loss Lawyer

If your financial advisor acted without due consideration of your financial situation and you suffered losses as a result, you may be able to pursue legal action agains them. At Wolper Law Firm, our investment loss lawyer can help maximize your recovery and defend your interests in cases involving securities litigation and FINRA arbitration. Contact our attorneys for a free legal consultation today.

Attorney Matthew Wolper

Attorney Matthew WolperMatt 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. [Attorney Bio]