Investors depend on financial professionals like stockbrokers to grow their wealth and help them prepare for retirement. While investing comes with an inherent amount of risk, clients trust their broker to employ the best investment practices and standards to give them a positive return. If a financial loss stems from the failure of a broker or firm to carry out its expected duties, it may result in a charge of stockbroker negligence.
What is Stockbroker Negligence?
Broker negligence occurs when a broker engages in behavior that increases the risk of loss for investors and falls below industry standards. Such negligence can be active, such as executing unauthorized trades, or passive, such as omitting facts about an investment opportunity. Negligence does not need to be intentional and may stem from the accidental failure to execute an expected action.
Broker negligence is a serious concern because of the level of trust between brokers and their clients. Stockbrokers are essential to the investment process, and investors rely on them to handle their accounts according to their instructions and in line with their goals.
The Role of a Broker
Stock exchanges only allow members to make trades. A member of a stock exchange can be an individual or belong to a member brokerage firm. These licensed brokers invest their clients’ money in stocks on the market, often being paid a commission for each trade.
Duties of a Stockbroker
Brokers carry out practical duties for their clients such as performing transactions and sharing information about investments. However, they also have legal duties that define how they handle these tasks.
A Duty of Suitability
Investors come with different goals, assets, and risk tolerances. Part of a broker’s job is to make investments that align with their clients’ needs. For example, a high-risk stock might be an inappropriate investment for someone near retirement.
A Duty of Reasonable Care
As a financial professional, a stockbroker is expected to act in line with the standards of their trade. If a broker takes unexpected risks with client assets, they may not be exerting reasonable care.
Fiduciary Duty
A fiduciary is someone required to work in the best interests of their clients, placing client interests ahead of their own. A broker is not a fiduciary on the same level as a financial advisor, but they still have a fiduciary obligation to their clients. The level of fiduciary duty increases with the trust level of the client/broker relationship. A discount broker who only handles trades for clients has a lower fiduciary expectation than a broker who actively advises clients or has direct control of client assets.
The Need for Client Authorization
The level of authority a broker has over client assets varies. Some brokers have permission to carry out trades as they see fit while others only act with direct permission for each transaction. However, brokers are only supposed to complete transactions if they have been authorized to do so by their clients.
Examples of Broker Negligence
Stockbroker negligence can harm clients through direct financial losses and missed opportunities. A few examples of broker negligence include:
- Failure to Execute Trades: Failing to buy or sell stocks on time can result in client losses.
- Failure to Diversify: Many investors seek the security of a diverse portfolio. Failing to diversify can cause sudden losses.
- Unauthorized Trading: Executing trades without client permission may disrupt investment plans.
- Misrepresentation or Omission of Material Facts: Failing to disclose vital information may persuade the client to invest in an unsuitable product.
- Unsuitable Recommendations: Promoting stocks that do not align with a client’s goals or risk tolerance may result in unexpected financial harm.
- Churning: Making unnecessary trades to increase a broker’s commission is not in the best interest of a client.
Signs of Potential Broker Negligence
While investors put their trust in financial professionals, they also have a responsibility to keep track of their own portfolios. Troubling signs of broker negligence or misconduct are often present before there is a significant loss. Investors should look for:
- Unexpected, unauthorized trades
- Overconcentration in their portfolio
- Excessive trading
- Lack of communication
- Underperformance compared to the market
The Legal Implications of Broker Negligence
If clients suffer financial losses due to the negligence of their stockbroker, they can file a claim of broker negligence. To make this case, they must demonstrate that:
- The broker had a duty to the investor.
- The broker failed to meet the standards of that duty.
- The client suffered financial harm due to that failure.
The broker or brokerage firm may be found liable for negligence and must make restitution to the client.
Being found liable in a stockbroker negligence suit carries heavy implications for the broker or firm in question. Because the broker relationship is centered on trust, even unintentional mistakes can damage a broker’s reputation.
Preventing and Addressing Broker Negligence
The prevention of broker negligence begins with the selection of a broker. Potential investors must employ due diligence, checking the record and reputation of the broker or firm. Once they have selected a broker, clients should monitor their personal portfolios. If they see red flags, they should contact the broker immediately. In many cases, a phone call demonstrating the client is paying attention is all that is necessary to prevent negligent behavior.
When a client suspects they have suffered financial losses due to broker misconduct, it may be appropriate to seek legal action. While financial professionals make mistakes like all people, their clients should not have to suffer for them.
Seeking Professional Legal Assistance for Stockbroker Negligence
Stockbrokers are expected to live up to the standards of their profession. When their failure to do so leads to financial loss, clients have the right to hold them accountable for their negligence.
If investors have suffered losses due to broker negligence, working with the skilled legal team at Landsman Saldinger Carroll can make a great difference in the strength of their case. The team at Landsman Saldinger Carroll understands FINRA rules and understands the duties and expectations of a broker/client relationship and how they can be broken. This knowledge may help clients recover some or all of their losses.
Contact Landsman Saldinger Carroll today if you believe you have been a victim of stockbroker negligence or fraud.
