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How can I determine if my investment advisor or stock broker committed malpractice?

How can I determine if my investment advisor or stock broker committed malpractice?

Frequently Asked Questions

Some (but not all) investment fraud can cause a “red flag” to be raised that can make an investor suspicious. The investor should be on alert to look for such red flags. The following are a few of the more common things to watch for:


1. In making a presentation to you, your advisor says or does one or more of the following:


  • Your investment will have a guarantee not to lose principal and be available for you to withdrawal your money at any time. (This is almost NEVER the case.)
  • The investment will increase in value regardless of whether the stock market goes up or down. (Almost never the case.)
  • The investment being pitched is “a sure winner,” “a no lose proposition,” or something similar.
  • The advisor says you must “act quickly” or “this is available for a limited time only” or some similar claim to act hastily. Never invest hastily.
  • The advisor refuses to put his statements in writing to you.
  • The advisor has you sign documents without giving you plenty of time to read and ask questions before signing.

2. Examine your periodic statements.


If you are like most investors you take a quick look at your email box or your statement that is mailed to you and move it to your file cabinet without taking a closer look at it. You should examine your periodic statements to see if there are transactions on your statement that you did not authorize. Furthermore, if your account is dropping in value and you do not know why or cannot understand why, this could be a sign that your investment advisor has mislead you. If you can’t understand your statement, your investment advisor may have placed your funds in investments too complicated for you. Most investments carry a risk of loss of principal, which means that they can go down in value. If your advisor did not explain that to you, and you see your account dropping in value, a fraud or malpractice may have occurred. If you review your statement and you don’t understand it, contact someone you trust (your tax accountant, your advisor, a trusted friend, or even us) and have your statement explained to you. If you see things in your statements that don’t seem right, trust your instincts, as it is possible that an advisor may have committed malpractice.


3. Changes in suitability.


Your investment advisor or stock broker is suppose to follow your guidelines and make recommendations based on your particular life’s circumstances. For example, if you are 6 years or less away from retirement, your investment advisor should not be placing the majority of your funds in investments that have a significant risk of losing money, since you will not have a work life expectancy long enough to make up for the losses. Even if your investments were suitable at the time you made them, your investments may no longer be suitable for you today based on your retirement horizon, needs, objectives, financial means, and changes in market conditions. Your broker should contact you on average approximately once a year to discuss with you these factors to determine if your account needs to be rebalanced. If your broker fails to contact you each year, you may have grounds to be suspicious.


4. Your broker is suppose to answer all of your questions.


If you have questions, concerns, or even suspicions about your investment account, contact your broker and ask questions. After you have contacted your broker, follow up with a brief written letter or email (and keep copies for your records) repeating those questions asked over the phone. If your broker fails to directly answer any of your questions, (or even worse, ignores your request), you definitely have grounds to be suspicious and concerned. (We have had many clients tell us their investment advisor won’t answer their questions after they purchase an investment, but instead constantly passes them off to someone else in the office. This is a red flag.)


5. Beware of claims of “inside” information or knowledge.


It is illegal for an investment advisor or stock broker to recommend that someone buy or sell an investment based on inside information or knowledge. (You will recall that Martha Stewart went to prison because of this.) This can get you into a lot of trouble. If your broker even mentions inside information or inside knowledge you need to avoid him/her like the plague. This is definitely a red flag for an unscrupulous broker.


6. Solicited and unsolicited trades.


Each time you purchase or sell an investment of any type, you will receive what is called a “confirmation”. Confirmations are always listed as “solicited” or “unsolicited”. When you receive a confirmation check and see how the broker has labeled this particular trade. “Unsolicited” means you called your investment advisor and directly ordered an investment based on your own investigation. “Solicited” means you chose to sell or purchase an investment based on your advisor’s recommendation. If there are more unsolicited trades or the number of these unsolicited trades increase you may have reason to be suspicious. Some unscrupulous advisors label trades “unsolicited” rather than “solicited” even where the advisor has actually recommended the investment to his customer. The “mislabeling” of such investments is an effort to create a paper trail to make it look like the investment advisor or securities broker did not recommend the investment to you. If you see this happening, you definitely have reason to be suspicious.


7. You simply cannot understand what you are invested in.


It is an investment advisor’s responsibility to use his or her very best efforts to make sure you understand where and how your money has been invested. If you don’t have a clue, your investment advisor may have committed malpractice by putting your money in investments that are either unsuitable for you, or too complex for you to understand. Ask questions. If you do not obtain understandable answers, this may be a red flag.


8. Your account has substantially dropped in value.


As discussed earlier, most investments fluctuate in value, which means the investments can lose principal value depending upon what you are invested in, and what the markets are doing. Still, some investments are much riskier and more speculative than other investments. If you anticipated your investments would not go up or down more than 5% or 10% a year, and you see either an increase or drop in value that exceeds 10% for any given year, your investment advisor may have put you into investments that are too risky for your peace of mind. If you are 7 years or less away from retirement and your account drops 10% in value, it is probably not the end of the world because there is a decent chance your account can recover its losses before your retirement rolls around. On the other hand, if you are only three years away from retirement and your account has lost 40% of its value, you have every reason to be concerned and suspicious because there is a good chance you will be wanting to retire before your money has time to recover as a rough rule of thumb. If you see your account has lost 25% or more and you did not think that was possible, you should contact Starr Austen & Miller to see if you have been the victim of possible investment advisor malpractice.


If you believe you have been taken advantage of, contact us right away. We can help you know if you have a legitimate securities fraud case.

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