Investors: Has Your Broker Left You "Swimming Naked?"

For the last few years, the stock market has been doing gangbusters, and retail investors are bound to feel pretty good about their investments and the broker-dealers in charge of them. But for some unwitting investors, the overall strong performance of the market has been masking underlying problems with their investment accounts - sometimes big problems. As Warren Buffet famously said, “Only when the tide goes out do you discover who's been swimming naked.”

The Suitability Rule of Investments

The most common hidden problem in retail investment accounts is a suitability mismatch. Suitability is one of the most important and hotly debated concepts in the securities industry. The principle of suitability as described by the SEC and FINRA, the industry’s regulatory agency, is two-fold: it stipulates that a) any investments in your account must first be suitable for any investors (that is, they must be legitimate, viable investments and not “lemons”); and, b) that your investment portfolio is suitable for your investor profile and investment objectives.

Suitability mismatches may occur any number of ways, but typically we find that mismatches take two primary forms: investments may be too risky or too illiquid, or both. Since investor profiles are derived from your financial situation, risk tolerance, age, investment goals, and numerous other factors, it is vital that your portfolio reflects these factors. Too often, in situations of misconduct or negligence, investors may be shocked to find that, rather than reflecting their profile, the composition of their investment accounts are tainted or skewed by other considerations. These considerations may be anything from an inexperienced broker’s mishandling of a complex financial product, like a nontraditional ETF or REIT, to excessive trading in the account, to the purchase of alternative investments in order for the broker to gain higher than normal commissions or fees.

Suitability Standard Vs Best Interests Standard of Investments

Unfortunately, suitability allows for some rather large gray areas, which is why recently investor advocate groups and public officials have been pushing for more stringent standards. One standard which applies to investment advisors registered with the SEC but not to financial advisors/stock broker is something called a “best interests standard.” This standard demands that investment accounts must not only be suitable with regard to investor profiles, but they must also unequivocally reflect the best interests of the investor. Such a standard would allow less room for cunning financial advisors to disguise their own personal interests in investments that are only marginally appropriate for their clients. Naturally, investors and their advocates alike should support such an elevated standard as an important weapon in the war against broker misconduct and abuse.

Rather than wait until, as Buffet put it, you discover you’re swimming naked, take the time carefully to review your investment account statements for unsuitable investments. If you don’t recognize a certain product or class of products, ask your broker about them. If you can’t get a straight answer, speak to his or her branch manager. Your broker and broker-dealer should be able to account for the overall strategy as well as the individual investments in your accounts. If not, watch out for that sinking tide…

Securities Attorneys

If you or anyone you know has been the victim of broker misconduct or investment fraud, please contact our securities attorneys for a free consultation toll-free at 1-855-462-3330 or via email by clicking here