When you invest your capital in a portfolio, you are, in many ways, investing your past, your present, and your future, along with your family’s future. Handing all that over to a broker is the ultimate sign of trust. So, when that is betrayed through unsuitable investments, the losses are monetary and far beyond.
Some investors are part of larger corporations or more generational wealth. When you are a sole proprietor or individual, an unsuitable investment can devastate you and your employees. All your focus is on starting and running your business and portfolio. A broker leading you astray should be the last thing to worry about.
If you experienced losses in an investment, though, there is still hope to recoup them. Here are three things to know about recovering losses due to unsuitable investments.
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What are unsuitable investments?
Unfortunately, brokers can commit many types of investment fraud with their investors’ money, ranging from insider trading to Ponzi schemes. One particular type, though, is unsuitable investments.
This applies when a broker takes advantage of the implied and implicit trust associated with being in charge of someone’s portfolio.
While some of this seems subjective, there are clear rules and regulations for brokers to ensure they don’t take advantage of you in this way. They must follow FINRA rule 2111 Suitability.
This rule essentially states that a broker must have a reasonable basis to believe that a recommended investment or investment strategy is suitable for their customer. This rule is designed to ensure that brokers act in their clients’ best interests by considering the client’s financial profile, objectives, and risk tolerance before making recommendations.
Types of unsuitable investments
As an investor, you typically have specific parameters for how you want your money spent. These can include the amount of capital you are comfortable investing in, the companies you want to invest in, and how often you wish to make trades. It is essential to remember that your broker works for you and your interests. If you cross these parameters, sometimes even without your knowledge, these moves can be considered fraud.
If a broker recommends dangerously risky investments that can not be readily liquidated, they may be considered unsuitable.
Another example is when a broker suggests focusing part of your portfolio on non-traded real estate funds. These funds are not publicly traded and can’t be easily tracked. They also require more upfront costs without a guaranteed reward.
Speaking of guarantees, if a broker presents a “guaranteed sure winner,” be cautious. This happens when a broker or broker firm makes assurances that can’t always be kept, telling you that a stock is sure to go up but does so without any proof. For that matter, there are no guarantees in life, much less the stock market or business.
Suppose a broker becomes pushy or aggressive or acts in a way that we won’t explicitly name because it is offensive to those who sell previously owned motor vehicles. In that case, they can push you towards an unsuitable investment and commit fraud.
Your options for recovery
Aside from feeling violated by being taken advantage of by someone you were supposed to be able to trust, there are also the logistics of significant financial loss. This is especially true for someone running a business. Oftentimes, employees’ retirement portfolios are tied to investment opportunities. If a broker facilitates an unsuitable investment, it affects you and others whose livelihood depends on you.
As such, recovering the losses is of the utmost importance. The best way to do this is through a FINRA arbitration case. This is typically the only way to recoup money lost due to broker fraud. A FINRA arbitration case holds the same weight as taking the broker firm to court. It requires an attorney experienced in FINRA law and broker fraud to help lead the process.
An arbitration panel will hear the case, and their decision is often final with little to no chance for appeal.
Conclusion
When you invest your money, you are choosing to put your future—and sometimes the future of those in your care, from families to employees—in the hands of someone who is supposed to know the best way to treat said investment. This is someone expected to learn the ins and outs of the business, the risks and rewards associated with different investments, and most importantly, have your best interests at heart. If that is not the case, even in the case of something more ambiguous, such as unsuitable investments, you have rights and a path to recover those losses. It is, after all, your due.
