About half of American families have money invested in the stock market (either directly or indirectly). This means that a lot of people with no investment experience have a substantial amount of money tied up in a creature they do not understand. Most investors are happily ignorant while their investments are lucrative, and turn a blind eye to the risky or even fraudulent activities of their brokers. When the money disappears, however, so does the blindness, and investors are left wondering what they can do to get their savings back.
When Can I Sue to Recover my Investment?
Inexperienced investors sometimes have no idea that realized stock market losses are not insured and thus are unrecoverable. Often, paper loss (unrealized, meaning the investor has not withdrawn what’s left, or has not lost everything) is simply the result of market fluctuation and may be alleviated when the market begins to climb again.
Some loss, unfortunately, is permanent and so drastic that it may leave an investor feeling like he or she has no option but to sue the advisor of the portfolio. This is especially true of retirement investments because losing these can leave a person without any income after retirement. Investors must remember that just losing money in the market, even a lot of it, does not mean they can sue their advisor. Investment portfolios are part of a risky betting business, and a losing stock doesn’t always give you the right to retrieve your wager from your broker any more than a losing horse gives you the right to get cash back from your bookie.
That said, sometimes there is more to a loss than just bad luck. There are a number of legal theories that might give you a “cause of action” against, or reason to sue, an investment advisor who caused your loss.
What Kinds of Activities by my Advisor Allow Me to Recoup my Investment Losses?
Some common actionable activities by brokers include making unsuitable investments, breach of the fiduciary duty (the duty of utmost loyalty that most brokers have to their investors), stock churning (excessive trading), conflict of interest, and fraud. Each of these reasons to sue has different requirements, and sometimes more than one will cover what happened to your investment.
The most common cause of action is for unsuitable investments. Unsuitable investments are investments that are not in line with the type ideal for a particular investor. Typically, at the beginning of the investor-broker relationship, the investor has communicated how much risk he or she is willing to take, and the broker has outlined worst-case scenarios for the investor. This allows the broker to know the limits on what he or she can do and it makes the investor more aware of what is happening with his or her money.
When the advisor then makes seriously risky investments for an investor who wants a low risk portfolio, or uses strategies that are inappropriate considering the client’s needs, and the client loses substantially more money than he or she would have with a more fitting portfolio, then the client may be able to sue the advisor.
How Can I Protect Myself from Investment Loss?
Generally, the first time people notice that something is wrong is when they have already lost a lot of money. For this reason it is necessary to check on your investments and stay informed of your advisor’s actions. Keep track of the kind of stock you have. Note whether it seems like your broker is making excessive transactions (usually to drive up his commissions). Make sure your portfolio is not concentrated with all the same types of stock (this is risky). Monitor your account – it is illegal for your broker to withdraw funds without your authorization. If your broker ever told you that a certain investment was risk free, or that you wouldn’t understand your investments if he tried to explain them, you should be concerned as these are red flags for unscrupulous brokers.
What Can I Do if I Lose my Investment Due to the Fault of my Advisor?
If you have suspicions about your broker and the status of your investment, have another expert review your account. This may save a lot of time and money if your concerns are unfounded. No matter the kind of suit you are thinking of filing against your investment broker, you must go through the investment firm’s complaint process. Collect all of the paperwork and correspondence (including emails) regarding your investment, request all files with your name on them from your investment firm (they are required to give these to you), and then follow their process. You may not (most likely will not) recover anything from them at this point, but you never know.
If your complaint with the firm is fruitless, go talk to a lawyer. A lawyer will tell you whether or not he or she thinks you have a claim and what you can expect to recover from your investment advisor. The plausibility of your claim will depend on the particular facts of your case, so talking to a lawyer is very important to know whether you should pursue litigation.
Remember, not everyone who loses money is entitled to recovery, even if you’ve lost your entire retirement. It may be easier for inexperienced investors and those with low incomes to recover because it is less likely they understood or authorized your broker to take the kind of risks that can cause total loss. Still, there have been a number of extremely sophisticated investors who have recovered from their brokers for huge losses to their portfolios, so everyone has a chance.