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.
- 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.
- Losing money is not grounds alone for a claim unless your advisor has engaged in unethical conduct.
- If you feel like you have been legitimately wronged by a broker or advisor, you can file a complaint with FINRA.
- If your advisor has a professional certification, you can also notify the credentialing body.
Understanding Your Rights With a Financial Advisor
When you entrust your money to a financial professional, they have 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.
Before following a financial advisor's advice, ask them if they are a fiduciary. This means that they have a legal obligation to put your needs first.
Restrictions on Financial Advisors
An important point is that simply losing money on an investment doesn't mean you can sue your advisor for bad advice. Even if your advisor recommends an investment that does not perform well
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.
The Financial Industry Regulatory Authority (FINRA) has several rules governing the behavior of brokers and advisors. In addition to the well-known prohibitions against insider trading and front-running, there are two important restrictions on the assets that a financial advisor can recommend:
Falsehood or omission of facts in relation to an investment. This is a classic case of a client believing they were told one thing and then finding out after the fact that what they understood to be true was not the case. Financial advisors are also prohibited from making specific price predictions or guaranteeing that the clients will not lose money.
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.
Other Prohibited Conduct
In addition to the restrictions listed above, FINRA also prohibits other forms of manipulative practices, such as making trades without the customer's prior authorization or failing to execute their trades at the best possible price.
Before engaging the services of a financial advisor, make sure you understand their fee structure. Otherwise, your portfolio gains could become their commission payments.
How to File a Complaint
If you think you have a legitimate dispute with your broker or advisor, there are a couple of steps you can take. But the first step is to contact your firm's branch manager or compliance department. If the error cost you money, you should make this complaint in writing and keep copies of all correspondence.
If you are not satisfied with the firm's response, the next step is to file a complaint with the appropriate regulator. For broker-dealers, you will need to file a dispute with FINRA. For complaints against investment advisors, contact the SEC or your state securities regulator.
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 CFA Institute.
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 Financial Advisor
The best way to avoid unscrupulous brokers is to do your homework beforehand. Always check the background of the firm, broker, or planner for any past disciplinary problems. Ask about their investment style and what style they feel is best suited for you.
Asking these questions will give you a better understanding of the broker, as well as provide something to fall back on if you feel your money has been placed in investments that do not coincide with your objectives.
Securities regulators in the United States have made most of this information relatively accessible through the Central Registration Depository, a disciplinary and employment database. On the FINRA website, you can perform online searches via its 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.
How Do You File a Complaint Against a Financial Advisor?
Complaints against financial advisors can usually be made against their regulatory body. For registered investment advisors, that's the Securities and Exchange Commission or local securities regulators. Complaints against brokers can be filed with FINRA. If they have any additional certifications—such as a CPA or CFP—you can also file an ethics complaint to the professional body that issues that certification.
How Do I Find Out If a Financial Advisor Has Any Complaints Against Them?
Disciplinary records for financial advisors are available through state or federal-level securities regulators. Public disclosures about SEC-registered investment advisors are available on the SEC's Investment Advisory Public Disclosure site. Data on state-regulated professionals can usually be found through state securities regulators. Information on securities brokers can be found through FINRA's BrokerCheck.
How Much Can I Gain From Hiring a Financial Advisor?
While there are no guaranteed returns, research suggests that a financial advisor can improve investment returns by an average of 1.5% to 4%, depending on the time horizon and how those gains are measured. However, some of those gains will be lost to any fees or commissions charged by the financial advisor.
The Bottom Line
Financial advisors are trusted with their clients' wealth, sometimes representing a lifetime of savings. In order to ensure ethical conduct, they are strictly regulated, both by the government and their own industry certification bodies. If an investor believes that they have lost money through unethical conduct, there are many ways to seek a resolution.