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Avoid Investment Losses by Recognizing the Signs of Financial Advisor Misconduct

On Behalf of | Apr 21, 2020 | Financial Advisor Misconduct

Investing involves risk. In many instances, portfolio losses to are simply the result of the inherent risks of investing. In other instances, losses may be due to misconduct by financial advisors and/or their firms.

No matter what the underlying actions are, there are clear signs that investors should keep a vigilant eye out for while monitoring their portfolios, especially in volatile markets.

Common issues with investment recommendations include:

  • Unsuitable investment recommendations: Your financial advisor should always make recommendations that are in line with, among other things, your overall financial goals, time horizon and risk tolerance. You should also always understand the fee structure of your investments.
  • Unauthorized trading: Only those with proper authority should be directing trades in your accounts. If you notice trades that were not approved by authorized individuals, you should ask questions immediately.
  • Improper use of margin: Trading on margin simply means that you are borrowing funds to purchase more securities. This is a more risky strategy that may significantly increase the chances of investment losses in your portfolio. Investors should monitor cash balances in their portfolios regularly. Investors should never trade on margin unless you have discussed margin with your advisor, and you fully understand the risks.
  • Promises of strong results without downside risk: As the adage goes, if it sounds too good to be true, it probably is. All investments carry some element of risk. Generally, the higher an investment’s potential return, the greater the underlying risk of the investment. If a financial advisor promises double-digit returns with little or no risk, investors should be wary and ask questions.
  • A pressurized sales environment: Financial advisors who are engaging in improper actions will often push investors to act immediately. Investors should deliberately consider any investment recommendation, and investors should always have the opportunity to take as much time as they need before making an investment decision.
  • Lack of diversification: Diversification is the practice of investing in a basket of different asset classes (e.g., stocks, bonds or cash) and industries to reduce the overall risk of the portfolio. If a portfolio is largely concentrated in a single product or security, investors should take notice and ask questions about the overall risk of the portfolio.
  • Requesting personal payments or loans: When opening a brokerage account, the standard practice is to deposit checks or send electronic transfers to the firm. Brokers engaging in misconduct may instead request that their clients write checks to them personally, a clear red flag that the advisor intends to pocket your money for themselves. Furthermore, you should never lend money to your financial advisor.
  • Excessive Trading (churning): Unless your account is a fee-based account in which you do not pay commissions for each trade, a high volume of trading should be questioned as the advisor may be putting his/her interests ahead of yours.
  • Complex Investment Products: If you do not understand recommended products, do not purchase them. Products such as annuities, private placements, non-publicly traded REITS, UITs and structured investments all may have a place in your portfolio. That said, your financial advisor should ensure you understand the product, the fee structure and the reasoning for the recommendation. If you do not understand the answers, you should avoid the product.
  • Selling away: Selling away refers to the practice of a financial advisor selling a security without his/her firm’s approval. When a financial advisor sells away, you lose the supervisory protection that firms are obligated to provide. Not seeing an investment listed on your account statement could be a sign that the financial advisor is selling away.