How can I protect myself from future broker misconduct and fraud?
How can I determine if my broker is making legal investments?
Financial advisors and stockbrokers are required to propose investments that are suitable for their customers. The concept of suitability requires an assessment of a number of factors, including the client’s age, income, net worth, tax status, investment objectives, risk profile, liquidity needs and time horizon.
Instead of using these factors to determine suitable recommendations, stockbrokers sometimes recommend investments that pay the highest commissions. Investors should be skeptical of claims made about investments, and they should be prepared to conduct their own research prior to investing in any company or financial product.
The U.S. Securities and Exchange Commission advises investors to ask five key questions before making an investment.
Investing is a complex business and your financial expert has an obligation to explain your investment options. If you don’t understand what they are talking about, speak up! Ask questions and insist on answers when you don’t understand.
Rarely will an advisor admit to they made a mistake. Closely following your account and statements will alert you to potential issues as soon as they appear. Keep detailed records of all contacts with your financial expert and their dealings. If you suspect fraud, details like name and contact information, regulatory registration number, and a timeline of events may be the key to your loss recovery.
An investment is considered “appropriate” when it aligns with your investment objectives and risk tolerance, taking into account factors like your age, current asset mix, and employment status. It’s important to note that not all inappropriate investments will lead to financial losses, just as not all suitable investments will guarantee gains.
For instance, older investors should avoid high-risk investments since recovering from any potential losses would be challenging, if not impossible, given their limited income-earning capacity. On the other hand, younger investors with a longer time horizon before retirement can afford to take on greater risks. An inappropriate investment for a young worker would be one that offers unacceptably low returns.
When assessing the suitability of an investment, investors should consider the expected rate of return, the risk of potential losses, and the liquidity of the proposed investment.
Asset allocation also plays a crucial role in determining suitability. Older investors should consider shifting their portfolios towards low-risk investments and reducing exposure to equities. Even if an investment seems reasonable, it may not be suitable if it significantly tilts an older investor’s portfolio towards equities.
Lastly, the concept of “suitability” is not static and evolves over time. An investment that is suitable for a young individual may become inappropriate if they get married, have children, or lose their job. It is the joint responsibility of the stockbroker and the individual investor to monitor investments for suitability throughout the investment journey.
A broker or brokerage managing an investment account is obliged to adhere to the contractual terms governing that account, federal and state securities laws, the regulations issued by the Securities and Exchange Commission (SEC), and the guidelines established by the Financial Industry Regulatory Authority (FINRA). Frequently, if an investment appears excessively advantageous, it may not be trustworthy. It is advisable to consult with a qualified securities litigation attorney to examine your portfolio and ascertain whether their suggestions adhere to relevant laws and regulations.
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