Are professionals, such as financial planners and brokers, liable for the advice they give?

By Investopedia Staff AAA
A:

In the U.S., the Securities and Exchange Commission (SEC) does its best to protect investors from being cheated. To do so, it keeps a close eye on the work of investment professionals as well as the investments themselves. However, the extent to which professionals can be held liable for the guidance they give depends on the circumstances under which they do it.

To decide whether the investment professional should be held liable for his or her advice, the SEC will try to determine whether the investment advice was suitable for the client and whether the professional, bound to a fiduciary duty, acted in the client's best interests. To be as precise and concrete as possible in defining your "best interests," a professional who is hired to offer you advice should ask you for some documentation that outlines your risk profile and investment goals. Then, he or she is duty-bound to help you ensure that your investment choices remain consistent with your profile and goals.

Since financial planners and brokers are "professionals," they are considered experts, which in turn gives them a responsibility to give you proper guidance in your financial endeavors.

If you act on any investment advice that you believe caused you losses because it was inappropriate according to your risk profile and investment goals, you should immediately contact the professional who gave you the advice, his or her company and the SEC (all in writing). For you to have a chance of being compensated for what you lost, you must prove that the broker's suggestions were not within the specifications included in your risk profile and investment goals, and that you were not made properly aware of the financial risks involved. If the investment was in fact in line with your profile, or if your broker fully explained to you what the risks were and you invested anyway, the financial professional is typically not liable for your losses. Remember that, although brokers and financial planners must act in your best interests, they cannot control market movements or reverse the risk/reward tradeoff, so you can't blame them for all your losses.

To read more about financial advisors, see Find The Right Financial Advisor, Choosing An Advisor: Wall Street Vs Main Street and Tips For Resolving Disputes With Your Financial Advisor.

RELATED FAQS

  1. When does a business report gross margins?

    Learn how gross margins are calculated and when publicly traded companies release these figures. Explore consensus street ...
  2. How do I find a good personal bankruptcy lawyer?

    Read how to find a good personal bankruptcy lawyer, and learn how much you can expect to pay for services if you are considering ...
  3. What's the difference between legal defalcation and illegal defalcation?

    Discover what is meant by the term ''defalcation'' and how it can be used in multiple contexts to describe illegal or legal ...
  4. Who regulates a credit rating agency?

    Find out how American and international regulators interact with Credit Rating Agencies, and learn about the rules adopted ...
RELATED TERMS
  1. Occupational Safety And Health Act

    Law passed in 1970 to encourage safer workplace conditions in ...
  2. Administrative Order On Consent (AOC)

    An agreement between an individual or business and a regulatory ...
  3. Licensed For Reinsurance Only

    A license that allows a company to engage in services related ...
  4. Plant Patent

    An intellectual property right that protects a new and unique ...
  5. Patent Agent

    A professional licensed by the United States Patent and Trademark ...
  6. Duty Of Loyalty

    A director's responsibility to act at all times in the best interests ...

You May Also Like

Related Articles
  1. You may owe money, but you still have rights. There's a long list of things debt collectors are banned from doing to you. Know what's illegal.
    Credit & Loans

    5 Things Debt Collectors Can't Do To ...

  2. Sounds like a bad horror movie, but it really could happen to you. Here's how to identify zombie debt and send collectors back to the dead-debt graveyard.
    Credit & Loans

    How To Beat Off A Zombie Debt Collector

  3. Understanding how the debt collection business works will give you a better chance of coming out ahead if you ever have to tangle with a collection agent.
    Credit & Loans

    Inside Secrets Of The Debt Collection ...

  4. Investigate these expat havens if you seek a developed country with low barriers for getting a permanent resident visa – sometimes even citizenship.
    Personal Finance

    5 Developed Countries That Welcome Expats

  5. Two years into his first term, Mexican President Enrique Peña Nieto is following through on radical campaign promises he made to Mexican citizens for sweeping multi-industry reform.
    Investing News

    Mexicans Unsure about Mexican Reforms

Trading Center