It is not uncommon for investors to lose money through misselling or other forms of mismanagement. In extreme cases, investors may be legally entitled to compensation. Of course, investors can't just get compensation for poor performance or large losses. To get compensation, an investor needs evidence that the advisor or firm acted illegally or in contrast to the terms of the relationship. But, if you bring up these types of concerns, often they are quickly dissuaded by brokers with a wide range of excuses. In this article, we'll give you a sample of some common defenses that firms will use against investors - even those with legitimate complaints. (For related reading, see Is Your Broker Acting In Your Best Interest?)
What constitutes a legitimate complaint?
There are various wrongdoings that entitle investors to compensation.
The major situation where a claimable wrongdoing occurs is when the advisor makes investment decisions that clearly contrast with the goals that the investor sets out at the beginning of the relationship. To check this, take a look at the investment profile you signed when you signed up for your account. If your broker's actions clearly go against this profile, you may have a case.
There are also some illegal actions by brokers that give you the right to make a legitimate complaint and potentially seek legal help. If you are advised to buy into a particular investment that goes against your investor profile without receiving a full disclosure of the risks involved from your advisor, you may be able to claim damages. But this can be difficult to prove and your firm may fight you every step of the way. (For more on these situations Understanding Dishonest Broker Tactics and Tips For Resolving Disputes With Your Financial Advisor.)
The Blame Game
The most common defense against bad investment advice is to blame the investors on the basis that they were "experienced" and knew what they were getting into. It is easy to (mis)-represent almost anyone with investments as experienced, but this makes it neither factually true nor a valid defense. Again, look back at the investor profile to determine whether your advisor has acted against the risk tolerance and investment plan set out at the start of the relationship. (For more insight, see Determining Risk And The Risk Pyramid.)
For example, the firm may claim that it was a disgruntled investor's idea to put so much money into a particular investment when, in fact, it was a direct recommendation from the firm, for which it is responsible.
Ignorance Is Bliss
A firm may also claim that the broker spent more time with the client, discussing the portfolio and risks, than what actually occurred. And in many cases, no matter how much evidence you present to the firm about its legal obligations and how it bungled your investments, it may ignore you, or claim that it does not believe the investment to be "unsuitable" at all. Even if an investor manages to make a good case against the firm when an unsuitable investment has been made, the firm may simply state that it doesn't agree with the claim and will refuse to offer either an admission of wrongdoing or compensation.
To defend itself against a misselling complaint, a firm may also look for evidence that the investor has chosen risky investments in the past. This is sometimes referred to as a "fishing expedition". For instance, if you had some money in a foreign fund in 1994, regardless of what has happened since, this may be held up as proof that you are really a risk-friendly investor. A holiday in Las Vegas could also be used for this purpose! A complaint involving a British soldier who claimed that he was sold an endowment without being properly informed of the risks was at first rejected by the firm because it claimed that the investor's dangerous profession implied that he would put his money in the firing line as well, according to a March 2006 article in Money Marketing, a weekly newspaper for financial advisors based in the U.K.
Ill-Conceived or Unpredictable?
A firm may also try to steer clear of wrongdoing by claiming that an outcome was only predictable in hindsight. Although financial markets are generally accepted to be somewhat unpredictable, if an investment is unsuitable for a particular investor and a firm makes flamboyant claims about "market timing" or a "rapid reaction to changing market conditions", such defenses may be inadequate.
Firms may also try to lay blame on the market. Perhaps the Dow Jones drops by 30% in a period. Although this is beyond an advisor's control, if an investor is overexposed to the Dow Jones, this could present a different issue. There are also ways to control losses, such as stop losses, and whether a firm recommends these when things go wrong may play into whether you have any grounds to complain.
Look Past the Excuses
If you have lost money and you believe it is because your broker has not acted in your best interest, there are ways and means of getting it back. A good starting point is to see through invalid and unfair defenses. The most important thing to do is ensure that you have clear evidence that the firm, advisor or broker clearly acted against your wishes or acted illegally. If this can be shown you may have a good case. Also keep in mind, however, that investing involves the risk of loss, and even the most conscientious brokers will make bad picks. So don't jump the gun and try to blame your broker when your account balance takes a nosedive - in most cases, this occurs as a result of factors that are far beyond your broker's control. (For more, read 4 Dishonest Broker Tactics And How To Avoid Them.)
If you do decide to make a case against a firm or broker, provide the firm with evidence and don't let it be ignored. Educate yourself on precisely what the firm has done wrong and make it clear that you are willing to seek legal representation if necessary. Finally, if you wish to pursue your case as far as is needed, be prepared for litigation, and ensure that you have both a strong case and strong nerves.