There's no way around it: Losing money feels awful, and when losses start to stack up, it's human nature to start looking for somebody to blame. For many investors, the obvious culprit is the broker or financial advisor. Here we focus on possible disputes with your financial professional and how to deal with these problems. (See also: Is Your Broker Acting In Your Best Interest?)
- If it hasn't happened to you, you know somebody who feels like they've been burned by an incompetent or unethical financial advisor.
- The financial advisory industry is highly regulated and all investors and advisory clients have certain rights which must be upheld.
- If you feel a violation or mismanagement has occurred, first check to be sure that you have a leg to stand on - simply losing money on an investment is not grounds alone for a claim.
- If you feel like you have been legitimately wronged, file a complaint with FINRA, the SEC, or both. If your advisor has a professional certification after their name, you can also notify the credentialing body.
Know Your Rights
When you entrust your money to a financial professional, he or she has a duty to perform to a certain standard. In other words, as an investor, you have a number of rights. The North American Securities Administrators Association (NASAA) details your entitlements in its Investor Bill of Rights. Odds are, if any of these rights have been declined by your broker or advisor, you might have a case.
When you invest, you have the following rights:
- To ask for and receive information from a firm about the work history and background of the person handling your account, as well as information about the firm itself
- To receive complete information about the risks, obligations, and costs of any investment before investing
- To receive recommendations consistent with your financial needs and investment objectives
- To receive a copy of all completed account forms and agreements
- To receive account statements that are accurate and understandable
- To understand the terms and conditions of transactions you undertake
- To access your funds in a timely manner and receive information about restrictions or limitations on access
- To discuss account problems with the branch manager or compliance department of the firm and to receive prompt attention and fair consideration of your concerns
- To receive complete information about commissions, sales charges, maintenance or service charges, transaction or redemption fees, and penalties
- To contact your state or provincial securities agency for any the following reasons: to verify the employment and disciplinary history of a securities salesperson and the salesperson's firm, to find out if an investment is permitted to be sold and to file complaints (Source: Financial Industry Regulatory Authority)
Don't Jump the Gun
An important point is that simply losing money on an investment doesn't mean you can sue your advisor for bad advice. Remember, nowhere in the Bill of Rights does it say that investors are guaranteed a return! Markets are risky by nature. When you invest, you must take on some risk against which no law or regulation can provide protection. You should file a complaint only if you believe you've been defrauded—simply losing money isn't enough. (See also: Understanding Dishonest Broker Tactics.)
According to the Financial Industry Regulatory Authority (FINRA), the most common complaints against brokers and advisors are misrepresentation and unsuitability:
- Misrepresentation: Falsehood or omission of facts in relation to an investment. This is a classic case of a client believing he or she was told one thing and then finding out after the fact that what he or she understood to be true was not the case.
- Unsuitability: When a financial advisor or broker invests a client's money in a security that is not suitable for the customer's investment objectives. An example of this is an advisor investing large sums of money in high-risk securities for a person who is 75 years of age and has a low-risk tolerance. (See also: Evaluating Your Broker.)
How to File a Complaint
If you think that you have a legitimate dispute with your broker or advisor, there are a couple of steps you can take. If your complaint is against a stockbroker, you need to file a dispute with either the Securities and Exchange Commission or FINRA.
Many financial professionals are members of a charter organization (you can usually tell by the abbreviations after their name). These organizations also have standards and codes of ethics, so it's worth lodging a complaint with them as well. For example, if your complaint is against a Certified Financial Planner, you can file with the Certified Financial Planner Board of Standards. If it is against a Chartered Financial Analyst, you can contact the Association of Investment and Research.
Contacting your state or provincial securities commission is another avenue to take. Each state or province has a division that handles complaints against brokers, advisors, and financial planners. If these options don't work, your final course of action is to hire an attorney.
Choosing the Right Broker
The best way to avoid unscrupulous or fraudulent brokers is to do your homework beforehand. Always check the background of the firm and broker or planner for any disciplinary problems in the past. Ask the planner about his or her investment style and what style they feel would be best for you. Asking these questions not only gives you a better understanding of the broker but gives you something to fall back on if you feel that your money has been placed in investments that do not coincide with your original objectives.
Securities regulators in the United States have made most of this information relatively accessible through the Central Registration Depository (CRD), a disciplinary and employment database available from NASD Regulation. On the FINRA website, you can perform online searches for certain information and request that a detailed report be sent to you with a free tool called 'BrokerCheck'.
Finally, perhaps the most important thing an investor can do is be honest. If your broker or advisor suggests an investment that you don't understand, say so. An honest and credible advisor is one who will spend the time to ensure that you fully understand an investment beforehand. (See also: Picking Your First Broker.)