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Common Causes of Action in FINRA Arbitration

Posted: Aug 26, 2015 | Posted in:

If you lost money in stocks or other investments due to financial advisor fraud or misconduct, filing for arbitration under the Financial Industry Regulatory Authority (FINRA) guidelines may be your only opportunity to recoup your losses. Financial advisor and securities firm contracts typically mandate use of FINRA arbitration for resolving disputes. In this article, we take a look at some of the most common reasons investors institute FINRA arbitration proceedings against their financial advisors.

Breach of Fiduciary Duty
Financial advisors who provide investment advice may owe a fiduciary duty to their clients. As registered representatives with FINRA, financial advisors can be held liable in arbitration for failing to uphold their duties.

Simply put, the fiduciary aspect of the financial advisor-client relationship imposes an obligation on the financial advisor to always act with their clients’ best interests in mind. If the financial advisor advances his or her own interests or the interests of their firm to a clients’ detriment, the client may be entitled to compensation for their losses.

Unauthorized Trading
Financial advisors cannot make trades on a client’s account without the client’s consent. Unless you have authorized your financial advisor to exercise discretion in managing your account, your financial advisor must come to you for approval before making any trades. If you identify unauthorized trades on your account statement, you should contact an attorney right away to avoid the appearance of having “ratified” the unauthorized transaction.

Over-Concentration (or Too Much) in Stocks or Other Investments
Financial advisors should not over-concentrate (or invest too much) in stocks or any single other type of investment. Diversifying your investments among different asset classes such as stocks, bonds and real estate, or different sectors such as large cap and small cap companies, will lower your risk of sudden and substantial losses. This is particularly important for investors who are retired or approaching retirement age. However, even long-term investors should have well-diversified portfolios. If you have too much invested in stocks or another investment, you are at risk for significant losses from an unexpected stock market “crash” or other unexpected problem.

Misrepresentations and Omissions
In order to authorize a trade, you need to have all of the necessary information so you can make an informed investment decision. If your financial advisor misrepresents a stock or fails to tell you material information about an investment opportunity, you cannot give informed consent for the transaction. In FINRA arbitration, evidence such as emails and phone records can help demonstrate that your financial advisor failed to inform you of the risks of a trade.

Churning (Excessive Trading)
Remember your financial advisor’s fiduciary duty? It also means that your financial advisor cannot make trades solely for the purpose of generating commissions. This is known as “churning” and is grounds for obtaining financial compensation through FINRA arbitration. This compensation can include repayment of the excessive commissions plus recoupment for the gains you would have realized had your financial advisor managed your account in your best interests.

Unsuitable Investments
As fiduciaries, financial advisors are required to get to know you well enough that they can manage your portfolio to your personal savings goals and risk preferences. Then, they must only recommend investments or trades that match your investment profile. This is known as the “suitability rule.” Some examples of investments that may be unsuitable for investors because they can be very risky include: options, hedge funds, private placements, REITs, large single-stock positions, leveraged bond funds, closed-end funds, futures and commodities pools.

If a financial advisor makes or recommends unsuitable investments that lead to stock market losses, you may be entitled to recover your losses through FINRA arbitration.

Speak with a FINRA Arbitration Attorney About Your Case
If your financial advisor has made unauthorized or unsuitable investments, or if you have suffered losses due to another form of financial advisor misconduct, the attorneys at Zamansky LLC are here to help. To learn more about the FINRA arbitration process, please contact us today.