broker hold finra

Don't Let Your Broker Put You On "Hold"

Even the safest investment may become unsuitable over time

It’s safe to say most of the broker misconduct and fraud cases we litigate revolve around the concept of unsuitability. Unsuitability as a concept is well-defined by the Financial Industry Regulatory Authority (FINRA) that regulates the securities industry as any kind of investment or investment strategy that is inappropriate for a particular investor based on their age, life situation, risk tolerance, and investment objectives. However, in practice, especially when it comes to how investors or their investments change over time, establishing unsuitability can get pretty complicated and slippery. Imagine, as in one claim we filed recently, that before the financial crises of 2008-2009, a broker sells an unsophisticated conservative customer $100,000 worth of what has traditionally been very safe and reliable bank stock in, say, Wachovia. At that moment in time, the investment is completely appropriate and suitable for that particular investor. But then, eventually, when the financial crisis rapidly erodes the value of the Wachovia stock as well as, even more importantly, when that bank stock becomes much more risky, can we still say it’s an appropriate investment? No. The name is still the same, Wachovia. But it’s not the same security. It’s not only losing value, it’s become far too risky for the same investor, whose profile and risk tolerance have not changed at all. In other words, Wachovia, once suitable for our investor, is no longer appropriate to them, and the financial advisor in charge of the account has a legal obligation to inform the investor of this change and record the interaction with the investor. At least, that’s what FINRA’s 2012 rule states and is the subject of a recent review.

FINRA holds brokers responsible for monitoring changes in investments

Creative Commons. Photo by Jenny Downing

Creative Commons. Photo by Jenny Downing

The key thing to take away from this is that, as an investor, you can hardly be aware of how an investment which your broker recommended you “hold” has evolved into a risky investment that may no longer belong in your portfolio. That’s what you pay your broker commissions for. It’s his or her job to keep an eye on the market, your portfolio, and how the two interact. And that’s also why financial advisors who fail to monitor their explicit and implied “hold” recommendations are exposed to litigation if their client loses money. What’s more, brokers have access to internal and independent outside research companies that are constantly assessing and reassessing the risk attached to every possible kind of security. Most ordinary folks don’t have access to this information, and wouldn’t know what to do with even if they did. And that’s ok. Because financial advisors are well-paid professionals whose expertise on these matters you, as a novice, pay them for. It’s when they fail to hold up their end of the bargain that they open themselves up to claims of negligence. And rightly so. Just like the diseases doctors are responsible for keeping a diagnostic eye on as they evolve over time, investments unfold in real time and form part of an extremely dynamic marketplace. As the old saying goes, “Nothing is constant but change.” Brokers have to realize and be held accountable for what happens in their clients’ investment portfolios after they’ve made the sale and taken their commission. Far too often, once brokers have placed investors in certain securities and organized their portfolio, they forget it about and move on to the next client. After all, brokers are also salespeople and under constant pressure to find new clients. Still, it’s completely unacceptable and negligent for brokers to ignore the clients they do have for the clients they want to have. And FINRA has made it very clear once again that they will not tolerate financial advisors putting investors on “hold” without a very good reason for doing so.

As always, if you or anyone you know has been the victim of broker misconduct or securities fraud, please contact us immediately for a free consultation.