“She never explained anything”: I am an elderly person and I lost $100,000 on the stock market this year. Can I sue my financial advisor?

By Quentin Fottrell

“I told my financial adviser that I was going to retire months before all of this happened”

Dear Quentin,

I am a senior citizen and I suffered significant losses in the range of $100,000 during the recent stock market turmoil. Can I sue my financial advisor? I understand the dynamics of the market in terms of its ups and downs, and I’ve weathered them before.

However, it has been different with the market over this period as tech stocks are taking a hit, along with others. I informed my financial advisor that I was going to retire months before all of this happened.

As my account was experiencing losses, she did nothing to warn me that given the current situation, it might be a good idea to move my assets to another area to reduce the losses – and return at a later date when things will have stabilized.

I am now finding out from other advisors I have consulted that there is a term called “stop loss” for doing just that, stop loss. They also mentioned that she failed in her duties as an advisor. She never explained anything, like high or low risk management, or any other aspect of the market.

The only time we had contact was when I contacted her to buy different stocks. Other than that, she never called about anything regarding my account at any time. Can I file a complaint and, if so, how should I proceed?

Feel like a sucker

Dear FLS,

There are a lot of hurdles to jump through in order to sue your financial adviser and from what you have said here it does not appear that they have been encountered. All investing has an element of risk and the S&P 500, Dow Jones Industrial Average and Nasdaq have suffered significant losses this year: down 19%, 16% and 27.8% respectively.

Last year, you would have been on the back of the pig, and therefore a big fan of your financial advisor’s strategy. But no advisor is perfect. And no one – despite previous predictions – can predict the market. Even Warren Buffett, the Oracle of Omaha, makes mistakes. And he will recognize them when he does. This applies to your financial advisor – and your good self.

But back to your question of suing your advisor. You will first need to prove that you entered into a fiduciary relationship with her. That is, she agreed to put your interests ahead of her own and breached her fiduciary duty. You will also need to prove a direct link between his actions and your losses, and demonstrate that those losses could have been foreseen.

The Financial Sector Regulatory Authority has rules to help ensure investor protection. Learn more here. The Gibbs Law Group clarifies the difference between outright fraud, misconduct, and negligence, and gives some examples of the latter, including improper investments, failure to disclose material information, and overconcentration of investments.

A good adviser should understand your situation “and only recommend financial products that are appropriate for your age, your investment objectives, your experience and the desired level of risk”, writes the law firm in a blog on the subject. “But careless advisors will sometimes steer you into risky or unsuitable investments to get higher commissions.”

Diversity helps protect investors from excessive losses, but does not prevent them. “Investment over-concentration occurs when a financial or investment adviser fails to diversify a client’s portfolio, subjecting that client to excessive risk of loss,” he adds. Your losses can be across a wide range of stocks, as the overall market plunged in 2022.

A good adviser

Morey Stettner, a columnist for MarketWatch, told me it’s standard practice for advisers to document their communication with clients for compliance. Typically, advisors periodically hold review meetings with clients. “The adviser usually writes an ‘investment policy statement’ that covers the objectives of the investment strategy – and the client approves it and that’s documented,” he said.

“If a fiduciary breaches their fiduciary duty, that would trigger regulatory action against that adviser,” he added. “In any case, failing to check in with the client at least once a year to assess their risk tolerance and ask about their investment goals, time horizon, retirement planning, etc., is negligence. I’m not sure that’s grounds for a lawsuit.” (On BrokerCheck, complaints are usually listed under an advisor’s name.)

You may also misunderstand the concept of a “stop loss” and how such an order occurs. It is an order given by the investor, perhaps in consultation with their broker, to sell a stock if it falls below a certain level. But while it may stop the bleeding in your portfolio, it could also cause you to sell too many stocks at a lower price, without waiting for a potential rebound.

There will be a paper trail, but it seems unlikely that your adviser could be sued for not contacting you as often as you would like, even in a turbulent market like this. Sometimes the best action is no action. You have lost $100,000. We don’t know if it’s 100% or 10% of your overall portfolio. As a general rule, as you approach retirement, your investments should be more conservative.

Either way, don’t wait for your day in court. Most investment contracts include an arbitration clause. Finra and the Securities Industry and Financial Markets Association (Sifma), a trade group representing securities firms, banks and asset managers, argue that arbitration saves time and money for all parties. and helps facilitate small claims from retail investors.

Obviously, if you were to consult a lawyer, you would need to present more details. From your letter, however, it appears that you are upset about your paper losses and that your advisor takes responsibility for them. But notwithstanding the conditions for suing your adviser as stated above, there are two people in this relationship, and in many cases the liability works both ways.

Check out the private Moneyist Facebook group, where we seek answers to life’s trickiest money problems. Readers write to me with all sorts of dilemmas. Ask your questions, tell me what you want to know more or weigh in on the latest Moneyist columns.

The Moneyist regrets not being able to answer the questions individually.

By emailing your questions, you agree to have them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

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Learn how to shake up your financial routine at the Best New Ideas in Money Festival on September 21-22 in New York City. Join Carrie Schwab, President of the Charles Schwab Foundation.

-Quentin Fottrell

 

(END) Dow Jones Newswire

09-22-22 1310ET

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