Question: Is It Legal to Sue Your Broker?
Written by ITL Attorney, Posted in Securities Law
Answer: Yes, it is legal to sue your broker or financial advisor if you have suffered financial losses due to their misconduct or negligence.
As an investor, you have the right to take legal action against your financial professional if they have failed to act in your best interest or have engaged in practices that have caused you harm.
When Can You Sue Your Broker or Financial Advisor?
There are several instances when you can take legal action against your broker or financial advisor. One of the most common reasons we see all the time is a breach of fiduciary duty. If you’re curious, you can check the FINRA database and research the professional backgrounds of any U.S. registered investment professional, brokerage firms and investment adviser firms. There’s A LOT with disciplinary actions!
What is Fiduciary duty?
Fiduciary duty arises from various sources, including state common law, the Securities and Exchange Commission’s Regulation Best Interest (Reg. BI), and the Investment Advisors Act of 1940. A financial professional’s fiduciary duty requires them to perform their duties with the highest level of professionalism, act in the client’s best interest, and put the client’s interests above their own. Sounds good on paper, and most brokers and firms understand this, but there’s always a few bad apples who disregard all moral and legal ethics to make an extra buck.
If your broker or financial advisor breaches any of these duties, you may have grounds for a lawsuit.
Another instance when you can sue your broker is when they engage in unauthorized trading. Legally, brokers (including stockbrokers) must have express authority from their clients to execute trades on their behalf. If your broker makes transactions without your approval and you suffer financial losses as a result, you can seek compensation.
Material omission or misrepresentation is another reason to sue your broker or financial advisor… They are obligated to provide you with all the necessary information to make informed investment decisions. If you lose money due to their misrepresentation or failure to disclose relevant information, you have the right to take legal action.
Inappropriate investments can also be grounds for a lawsuit. Before June 30, 2020, the suitability rule required brokers to recommend securities that aligned with their client’s investment objectives, risk tolerance, and other unique factors. After June 30, 2020, Reg. BI required that investment advice be made with the investor’s best interests in mind. If you suffer losses because your broker made inappropriate investments, you may have a case against them.
Churning, or excessive trading to generate commissions, is another form of misconduct that can lead to a lawsuit. If your broker engages in frequent trading and charges high commissions (usually without much benefit for you), causing you financial harm, you can seek legal recourse.
Finally, a lack of diversification in your portfolio can also be a reason to sue your broker or financial advisor. They have a responsibility to discuss the risks associated with a concentrated portfolio and ensure that your investments are properly diversified. If you suffer losses due to a lack of diversification, you may have a case against your financial professional.
Proving Negligence or Fraud
To successfully sue your broker or financial advisor, you must prove two elements: liability and damages. Liability refers to the wrongful conduct (negligence or fraud) of your financial professional, while damages refer to the financial losses you have suffered as a result of their misconduct.
Proving fraud or negligence can be complex, and it is often beneficial to hire an experienced attorney to help you build a strong case. They can assist you in gathering evidence and navigating the legal process to increase your chances of a successful outcome.
Legal Options for Suing Your Broker or Financial Advisor
There are two main legal options for suing your broker or financial advisor: arbitration and a lawsuit. Arbitration is the most common path, as most brokerage firm customer agreements and investment advisory agreements contain arbitration clauses. FINRA arbitration is similar to court litigation, and it is crucial to utilize an experienced attorney to help you navigate the complex legal claims and arbitration process (you won’t fare well going into it alone–this isn’t small claim courts)/
It is important to note that arbitration is binding, and there are limited grounds for challenging an arbitration award. If you are unsatisfied with the outcome, you can only challenge the award if you can prove that the arbitrators were biased, did not apply the law correctly, or failed to consider the evidence presented.
In rare cases where an investment agreement does not contain an arbitration clause, you can file a lawsuit against your broker or financial advisor. Court cases often have strict procedural rules and can be more expensive and time-consuming than arbitration. However, a jury trial may potentially result in a more favorable outcome for the investor. It is essential to weigh the costs and benefits of a lawsuit with an experienced attorney before proceeding.
Re-cap
It is legal to sue your broker or financial advisor if you have suffered financial losses due to their misconduct or negligence… There are various circumstances under which you can take legal action, including breach of fiduciary duty, unauthorized trading, material omission or misrepresentation, inappropriate investments, churning, and lack of diversification.
To successfully sue your financial professional, you must prove both liability and damages. Hiring an experienced securities attorney can help you build a strong case and navigate the complex legal process.
When considering your legal options, arbitration is the most common path due to the prevalence of arbitration clauses in investment agreements. However, in rare cases, a lawsuit may be an option. It is crucial to consult with an experienced attorney to determine the best course of action for your specific case.
If you believe that you have been wronged by your broker or financial advisor, do not hesitate to seek legal advice. By holding negligent or fraudulent financial professionals accountable, you can protect your rights as an investor and work towards recovering your financial losses.
