It may come as a surprise to many financial planners that securities fraud attorneys often receive referrals from various financial professionals and advisers after they review a new client’s past investments. After the adviser is approached by a new client, he learns that the client is unhappy with losses suffered under the watch of a former adviser. As the new adviser reviews the account, he finds red flags that indicate the losses were caused by fraud or negligence, rather than by market-driven forces. To protect his client, the new adviser refers the client to a securities attorney to determine the best method to recover the losses.
A prudent financial planner should keep in mind several items when analyzing a client’s prior investment history. The issues and claims set forth below will help determine whether the client has been victimized by an unscrupulous adviser, and should be referred to an attorney to pursue claims for those losses.
1. Unsuitability
The suitability rule is well-known in the industry. A financial adviser is under a duty to only recommend investments she reasonably believes are suitable for the client. To determine suitability, the adviser must consider the client’s income and net worth, investment objectives, risk and tolerance and overall financial situation. The brevity of this article does not allow for a list of the many examples of unsuitable investments. However, common examples include elderly clients who are placed in illiquid investments or sold annuities, conservative investors placed in speculative stocks, and investors with a short investment horizon placed in illiquid private equities.
2. Diversification
A client may have a claim against a financial adviser who fails to diversify the client’s account. This is often referred to in the industry as an “over-concentration” claim. The client’s account may be over-concentrated in one market sector or in a particular type of securities. One common example is when a client’s account is invested entirely in one stock–often seen with clients whose account is never diversified after exercising company stock options.
3. Discretionary vs. Non-Discretionary
Financial advisers with discretionary control over a client’s account owe broad fiduciary duties to their clients. As a result, clients with losses in a discretionary account may have a breach of fiduciary duty claim against the financial adviser. A common scenario involving a potential discretionary account claim is when the client suffers substantial losses coupled with a financial adviser who failed to regularly communicate with the client, received overly-generous fees and commissions from the trades, or failed to disclose conflicts with particular securities purchased in the account.
4. Margin
A common complaint by clients is that they did not understand the use of margin in their accounts. Further, clients are often unaware of the high interest rates charged on the margin loans or the potential losses that may arise from margin calls. A client may need to seek legal advice if losses are attributable to inadequate disclosures on margin accounts or the improper use of margin that contributed to investment losses.
5. Elderly Clients
The protection of elderly investors has become a high priority for securities regulators as well as state legislators. A recent study showed that the elderly lose over $2.5 billion a year to fraudulent schemes. Denise Voigt Crawford, a past president of the North American Securities Administrators Association, stated that “elder financial abuse is becoming the crime of the 21st century.” Given their susceptibility to financial abuse, it is not surprising that claims by elderly clients against financial advisers are on the rise.
Many claims are brought by relatives on behalf of elderly clients who were not competent to understand the investments recommended to them. This is not surprising as statistics show that one in eight Americans over 65 has Alzheimer’s disease. Regardless of the underlying condition, an adviser should carefully analyze any investment recommended to a client who he knows, or has reason to know, experienced a decline in her cognitive abilities.
Also, advisers should be skeptical of any long-term or illiquid investments recommended for an elderly client. These types of investments are typically unsuitable as elderly clients have short investment horizons and often need ready access to their money for retirement expenses and medical care. Securities attorneys regularly receive complaints by elderly clients who were advised to invest in private REITs or private equities but did not understand the illiquid nature of those investments. In several cases, their financial advisers failed to disclose the nature of such investments and told the elderly clients that the money was available upon request.
If you ever suspect that a financial adviser victimized your client, you should suggest that he or she speak with a securities attorney.