Why You Might Sue a Financial Advisor and How to Protect Yourself

The bond of trust between a client and their financial advisor is a cornerstone of any financial planning process. However, this bond can be broken when a financial advisor breaches their fiduciary duty, leading to a situation where you might sue them. In this article, we’ll explore the legitimate reasons to make such a decision, as well as common invalid reasons. We’ll also provide guidance on how to protect yourself when working with a financial advisor.

The Legitimate Reasons to Sue a Financial Advisor

Fiduciary Duty Violations: Financial advisors have a fiduciary duty to act in their clients' best interests, not in their own. Any breach of this duty can lead to legal action. Common violations include:

Unfair Investment Recommendations: When an advisor recommends investments where they have a financial stake without fully informing the client. For example, an advisor might recommend investment products where they earn a higher commission. Excessive Risk: Advisors might fail to adequately explain the potential risks of an investment, leading to a situation where the client is unknowingly exposed to significant risks. Direct Theft: In some cases, financial advisors might embezzle money directly from their clients, which is a clear breach of trust and can lead to legal action.

Historically, the securities industry was riddled with examples of such behavior. In the 1980s, a stockbroker I knew would sell clients Disney stock during the initial cold call to establish trust. Then, after gaining their confidence, he would recommend highly risky, high-commission-paying stocks, some of which were on the verge of collapse. This unethical practice is part of the reason why consumer protection laws have evolved over the decades.

Invalid Reasons to Sue a Financial Advisor

While the above scenarios are legitimate reasons for legal action, there’s another common, less valid reason people seek legal recourse against their financial advisor: lack of performance. Not every financial advisor can predict the future, and a lack of performance does not inherently mean that the advisor has breached their fiduciary duty. Such lawsuits usually fail because:

No Guarantee of Performance: Financial markets are inherently unpredictable, and even the best advisors can’t guarantee future returns. Limited Timeframe: It’s unfair to expect a financial advisor to perform outside of a reasonable timeframe. If a client has just joined a firm, it’s unrealistic to demand immediate success. Ongoing Market Fluctuations: Market conditions can change rapidly, and a strategy that was sound at the beginning of a period might be less effective later on.

These factors make it crucial to have realistic expectations when engaging a financial advisor. It’s important to understand that performance variations are a normal part of any investment strategy.

Protecting Yourself in Financial Advisor Relationships

While legal action is a last resort, taking proactive steps to protect yourself is essential. Here are some tips to ensure you work effectively with your financial advisor:

Understand the Bullion Firm: Research the firm’s background, including regulatory compliance, past incidents, and certifications. Look for a firm with a strong track record and a transparent relationship with its clients. Ask Questions: Be proactive in your communication. Ask about the risks involved, the fees, and the potential outcomes of any investment. Don’t hesitate to ask for explanations and clarifications. Ethical Guidelines: Make sure your advisor adheres to strict ethical guidelines set by professional bodies such as the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). Customized Advice: Seek an advisor who provides personalized advice that aligns with your specific goals and risk tolerance. Avoid one-size-fits-all solutions. Regular Reviews: Schedule regular reviews with your advisor to ensure that your investment strategies remain aligned with your objectives and market conditions.

By taking these steps, you can significantly reduce the risk of legal action and ensure a more fruitful partnership with your financial advisor.

Conclusion

Financial advisor relationships are built on trust, and when that trust is broken, legal action can become necessary. However, understanding the legitimate reasons for suing, as well as the common invalid reasons, can help you make informed decisions. By taking proactive steps to safeguard your financial interests, you can minimize the risk of legal disputes and focus on achieving your financial goals.