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‘She never explained anything’: I’m an elderly person and I lost $100,000 in the stock market this year. Can I sue my financial advisor?

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I am an elderly person and have suffered huge losses of $100,000 in the recent stock market turmoil. Can I sue my financial advisor? I understand the dynamics of the market to its ups and downs, and have ridden them before.

However, in this time frame, things have been different with the market as far as technology stocks take a big hit, as well as others. I told my financial advisor that I was retiring months before all this happened.

Since my account was posting losses, she did nothing to warn me that given the current situation, it might be a good idea to move my assets to another area to reduce the losses – and return at a later date when the business has stabilized.

Through other advisors I’ve consulted, I’m now learning that there is a term called “stop loss” to do just that, stop the loss. They also said she was failing in her duties as a consultant. She never explained anything, such as high or low risk management, or any other aspect of the market.

The only time we were in touch was when I contacted her about buying various stocks. She never called anything about my account. Can I file a lawsuit and if so, how do I do that?

feel like a sucker

Dear feeling,

There are many hurdles to go through in filing a lawsuit to sue your financial advisor and, from what you have said here, it appears that they have not been met. Every investment has an element of risk and the S&P 500 SPX,
+2.37%,
Dow Jones Industrial Average DJIA,
+2.47%
and Nasdaq COMP,
+2.31%
have suffered significant losses this year.

Last year you would have been on the hog and thus a big fan of your financial advisor’s strategy. But no advisor is perfect. And no one – despite previous predictions – can predict the market. Even Warren Buffett, the oracle of Omaha, makes mistakes. And he will acknowledge them when he does. That goes for your financial advisor — and your good self.

But back to your question of suing your advisor. You must first prove that you have entered into a relationship of trust with her. That is, she promised to put your interests before hers and that she violated her fiduciary duty. You would also need to demonstrate a direct link between her actions and your losses, and demonstrate that those losses were foreseeable.

The financial industry regulatory authority has rules to help ensure investor protection. Read more here. The Gibbs Law Group specifies the difference between outright fraud, misconduct and negligence, giving some examples of the latter, including inappropriate investment, failure to disclose material information, and over-concentration of investment.

A good advisor should understand your circumstances “and recommend only appropriate financial products for your age, investment goals, experience and desired level of risk,” the law firm writes in a blog on the subject. “But negligent advisors will sometimes steer you into risky or inappropriate investments to gain higher commissions.”

Diversity helps protect investors from excessive losses, but does not prevent them. “Investment over-concentration is when a financial or investment advisor fails to diversify a client’s portfolio, exposing that client to an undue risk of loss,” it adds. Your losses could relate to a wide range of stocks as the overall market plunged in 2022.

A good advisor

MarketWatch columnist Morey Stettner told me it’s standard practice for advisors to document their communications with clients for compliance. Typically, consultants hold periodic client review meetings. “The advisor typically prepares an ‘investment policy statement’ that includes the goals of the investment strategy — and the client signs it off and that’s documented,” he said.

“If a fiduciary breaches his fiduciary duty, that would lead to regulatory action against that advisor,” he added. “In any case, it is negligent to visit the client at least once a year to assess his risk tolerance and ask about his investment goals, time horizon, retirement planning, etc. I’m just not sure if that would warrant a lawsuit. (On BrokerCheck, complaints are usually listed under the name of an advisor.)

You may also misunderstand the concept of a “stop loss” and how such an order comes about. That is an order from the investor, possibly in consultation with his or her broker, to sell a stock if it falls to a certain level. But while that can stop the bleeding in your portfolio, it can also cause you to sell too many stocks at a lower price, without waiting for a possible recovery.

There will be a paper trail, but it doesn’t seem likely that your advisor could be sued for not contacting you as often as you’d like, even in a turbulent market like this. Sometimes the best action is no action. You lost $100,000. We don’t know if that’s 100% or 10% of your total portfolio. In general, your investments should be more conservative as you approach retirement.

Anyway, don’t expect your day in court. Most investment contracts contain an arbitration clause. Finra and the Securities Industry and Financial Markets Association (Sifma), a trading group that represents securities firms, banks and asset managers, argue that arbitration saves all parties valuable time and money and helps facilitate smaller claims from retail investors.

Obviously, if you were to consult a lawyer, you would need to provide more details. However, your letter shows that you are upset about losing your papers and that your advisor is taking the blame. But notwithstanding the terms of suing your advisor as outlined above, there are two people in this relationship, and in many cases the responsibility works both ways.

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