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What is a Broker's Fiduciary Duty

A broker is an individual that arranges a contract between a buyer and seller in return for commission. Brokers coordinate contracts for property that they do not possess and do not have personal interest. The property can be real estate, mortgages, insurance, stocks, bonds, and commodities. The most common types of brokers are securities brokers, commodities brokers, real estate brokers, mortgage brokers, and insurance brokers.

Regardless of a brokers’ specialty, he or she must adhere to moral and financial legalities or risk committing broker fraud. Wall Street has spent millions of dollars marketing its brokers as financial advisors or investment consultants. Many financial advisors provide broad investment advice regarding asset allocation and diversification. This investment advice has to be suitable to meet:

  • 1. The Investor’s Age
  • 2. Financial Abjectives
  • 3. Risk Tolerance
  • 4. Employment Status

A financial advisor violates his or her fiduciary duty to a client and acts against the client’s wishes or best interest if the advice or recommendation provided does not meet the investor’s specific needs.

What is Churning and Excessive Trading

Churning in stock accounts is a form of investment fraud that involves excessive transactions of your investment account's securities by your broker without regard for your financial objectives in order to generate commissions.

Though profitable for unethical financial professionals, churning is costly to investors and can devastate your life savings. Churning involves the regular turnover, purchases and sales of securities, in your portfolio to generate commissions. The broker-dealer is supposed to be supervising the trading activity of the financial advisor to identify actively traded accounts. For example, brokers who churn may sell successful investments (typically stocks and mutual funds) for a marginal profit to create the illusion that an investment portfolio is performing well while simultaneously weighing it down with stagnant or failing securities and depleting it with unfair commissions. Profitability is not a defense to churning a portfolio. However, if it were, a financial advisor could churn with impunity up to the gains of the portfolio. The Financial Industry Regulatory Authority (FINRA) prohibits the practice of churning and provides a securities arbitration process through which investors can seek to recover losses and illicit commissions.

A successful churning claim requires proving that your broker had control, or de-facto control of your investment account transactions and conducted transactions that were excessive in relation to your investment objectives, resources and risk tolerance and without regard for your best interests. Churning in stock accounts can be established using various methods, including calculations that can help determine whether a broker's transactions meet the definition of excessive. These calculations include assessing the commission-to-equity ratio and turnover rate of securities in your investment account.

What is Failure to Supervise

Investment firms have a responsibility to establish and maintain rules regarding the supervision of their registered financial advisors and brokers. The supervision includes regular reviews of your portfolio to ensure it meets your investment objectives and risk tolerance. Broker-dealers are required to contact you in response to red flags to ensure you understand the risks involved with your holdings or trading strategy. If your investments lost money due to a representative's negligent or fraudulent behavior and the firm's failure to supervise played a role, our lawyers may be able to help you recover your losses.

Oversight of Financial Advisors and Brokers:
Investment firms have a legal obligation to ensure that their agents adhere to various federal guidelines and securities industry regulations. The Financial Industry Regulatory Authority (FINRA), an agency overseen by the U.S. Securities and Exchange Commission (SEC), requires member investment firms to implement supervisory systems for registered representatives and their financial offerings. Because many large investment agencies operate satellite branches that may lack adequate supervision and because smaller investment firms may be acquired by and absorbed into larger ones with minimal oversight in the transition, there is often opportunity for a financial advisor's negligent or fraudulent behavior to adversely impact investors.

Failure to Supervise and Investor Losses:
There are a number of circumstances in which investor losses may be the result of an investment firm's negligence in the supervision of its authorized financial advisors, brokers and other investment professionals. These factors often relate to the duty of investment firms to provide adequate oversight regarding their agents' daily job functions and include:

  • 1. Failure to conduct appropriate reviews of financial advisor transactions, commission reports, customer accounts, and other records
  • 2. Failure to adequately supervise communications and material facts regarding investment products
  • 3. Failure to properly train financial advisors
  • 4. Failure to employ licensed brokers or registered investment advisors
  • 5. Failure to fairly and thoroughly investigate investor complaints

Securities loss claims that involve the failure to supervise often entail misconduct including:

  • 1. The misrepresentation or omission of information about an investment
  • 2. Churning, in which a broker executes excessive trades from a customer's account for personal financial gain
  • 3. Financial advisor or broker engaged in selling away from the firm

Ignorance of an investment professional's negligent or fraudulent behavior does not excuse investment firms from accountability. With the help of a knowledgeable lawyer, investors can pursue the recovery of their losses.

What is Investment Fraud and Misconduct

Many investors fall prey to the unethical practices of brokers who put their own interests above those of their clients. Common fraudulent investment products and scams include:

  • 1. Non-Traded Real Estate Investment Trusts (REITs): investors in non-traded REITs must rely on disclosures made by the sponsor of the REIT while paying high commissions. These investments are illiquid, and often underperform compared to REITs traded on an open exchange
  • 2. Junk Bonds: junk bonds are rated below investment grade by S&P and Moody’s. They carry a high risk of default and are not suitable for investors seeking stable investments.
  • 3. Ponzi Schemes: these schemes promise high returns, but use money from new investors to pay earlier investors.
  • 4. Structured Notes: a hybrid security product that generally includes a stock or bond plus a derivative. They may include hidden costs and are often riskier than promised to investors.
  • 5. Variable annuities: investors pay high commissions and costs for these products with high penalties for liquidating. They are often not suitable for elderly investors to whom they are recommended.

You should not accept market losses as a result of your advisor’s misconduct, mismanagement or self-dealing. Global Tax Solutions will fight for your life savings or retirement savings. Retaining Global Tax Solutions on a contingency fee basis will allow you to fight, without incurring extensive costs and legal fees along the way.

  • • Fact: Your advisor is required to understand who you are as a customer or investor before making any recommendation to you.
  • • Fact: Your advisor is required to recommend only those investments that match your investment objectives and your acceptable level of risk.
  • • Fact: Your advisor must ensure that each and every investment in your portfolio is within your comfort level of risk.
  • • Fact: Many advisors are primarily interested in selling you their products, and not very interested in fully understanding your investment objective and acceptable level of risk.
  • • Fact: Unfortunately, your advisor’s fees and commission schedules often work against your best interest.

What is Margin Trading

Margin trading is a practice in which a financial advisor recommends an investor purchase stocks by borrowing money from a broker-dealer using securities that are already owned as collateral. Brokers sometimes recommend margin accounts as a way to generate commissions without an additional up-front investment from their customers, despite the fact that margin trading is a high-risk strategy that is not in the best interests of many investors.

Financial advisors and brokers have an obligation to make investment recommendations that are consistent with an investor's financial objectives, risk tolerance, income level and other factors. When recommending margin accounts, financial advisors must make investors aware of the associated risks and receive written client consent prior to establishing margin accounts and engaging in margin trading. Investors should receive a margin disclosure statement that defines the terms of the margin account, including the interest charges linked to borrowing money for the margin account.

If your financial advisor or broker recommended a margin account that was inappropriate for your established circumstances and investment goals, or improperly used the margin account as a line of credit or to purchase unstable securities, he or she may have committed a breach of fiduciary duty and you may be able to pursue losses incurred as a result.

Margin Trading Risks:
Margin accounts may be sold to investors as a means of increasing their buying power to own more stock without full, immediate payment. Margin accounts are especially high risk for average investors seeking to build portfolios for retirement. Investors may suffer significant losses even in legitimate, consensual margin trading, although customers who agree to margin accounts are often not made fully aware of the risks. If the equity level of a margin account falls below the investment firm's maintenance margin requirements (the amount an investor's account must maintain after margin trades) the broker can sell securities without contacting or obtaining permission from the investor to cover the difference. Brokers may also charge commissions on the sale of these securities to compensate for the deficit, further depleting investors' resources.

Some financial advisors and brokers also make improper use of margin accounts to purchase speculative or volatile stocks, or treat margin accounts as lines of credit. Because of the complexities of margin accounts and the regulations that bind them, securities arbitration claims related to margin trading can be challenging for investors without the help of an attorney with extensive experience in cases related to investment malpractice.

What is Broker Misrepresentation or Omissions

The fundamental principle of both federal and state securities laws is complete disclosure of material risks and conflicts of interests. Many investors rely on information and recommendations from their financial advisors or brokers before approving securities transactions. The misrepresentation or omission of material information regarding an investment that results in losses may be considered a breach of fiduciary duty, and victims of this form of investment fraud may be able to recover their losses.

Financial advisors and brokers have an obligation to fairly disclose all known material facts related to an investment. Material facts encompass information a reasonable person would consider important in deciding whether to sell or purchase a security. Material facts include but are not limited to the disclosure of all fees linked to the investment, as well as known risks associated with the security being recommended or sold. Inaccurate or incomplete information can put investors at risk, and financial advisors and broker-dealers who misrepresent or omit material facts about an investment may be held accountable for resulting losses.

The misrepresentation or omission of investment information by a financial advisor or broker may be an intentional act of fraud or due to negligence. Some unscrupulous advisors and brokers may provide investors with unrealistic expectations for investments or base their recommendation of a security or strategy on an inaccurate risk assessment; others may not perform adequate diligence in researching and disclosing available material facts.

Establishing Misrepresentation or Omission:
Under rules established by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organisation that operates under oversight from the U.S. Securities and Exchange Commission (SEC) and state securities laws, losses attributed to a financial advisor's or broker's misrepresentation or omission of material facts may result in a securities arbitration claim for damages. In order to recover compensation for losses stemming from the misrepresentation or omission of material facts about an investment, an investor must establish details including:

  • 1. The investor relied on the recommendation of a financial advisor or broker
  • 2. The advisor or broker owed an obligation to the investor to disclose the material facts in question
  • 3. The misrepresentation or omission of information related to an investment was negligent
  • 4. The investment resulted in financial loss

What is Overconcentration of Assets

One of the fundamental principles of investing is the diversification of funds across different asset classes and market sectors to minimize the risk for losses without sacrificing returns. Often, concentrated portfolios are not easy to identify because the portfolio may have several mutual funds or dozens of holdings. Registered brokers and financial advisors have an obligation to know certain essential facts about individual investors in order to make appropriate recommendations and provide investors with the information they need to make informed decisions. These details include an investor's age, investment risk tolerance and financial status.

FINRA requires the broker-dealer to perform what is known as a customer-specific suitability analysis before any recommendations are made. All recommendations and investment advice, including trading strategies, must be in an investor's best interest and suitable for their investment objectives. If a financial professional or broker-dealer is fraudulent or negligent in recommending or allocating an overconcentration of assets that is inappropriate for your investment goals, income level, financial obligations and other individual factors, they may be held accountable for any losses you incurred.

Failure to Diversify Investment Portfolio
Although each investor is unique, financial advisors and brokers have an obligation to recommend a well-diversified portfolio. Asset allocation, diversification through stocks, bonds, and cash, can reduce risk without sacrificing returns. Each asset class behaves differently. For examples, stocks typically move up when bonds are down. This is known as inverse correlation. FINRA and the SEC believe asset allocation and diversification are critical and vital to building a well-constructed portfolio. Studies have found that asset allocation explains more than 90% of a portfolio's performance.

Surprising to many investors is the fact that stock selection and market timing account for very little of a portfolio's performance. The reason is because no one knows when the market or specific stocks are going to go up or down. This is commonly known as the random walk. The costs associated with getting in and out of positions when trying to time the market eat up whatever benefit was gained from the trades. Of course, the broker-dealer and your financial advisor make money on every security traded.

A balanced investment portfolio consists of a diversification of securities throughout different asset types such as stocks, bonds and cash, as well as multiple industry sectors such as technology, medical and energy in accordance with your individual circumstances and financial goals. Like asset classes, the industry sectors do not move up and down in tandem. Having each industry sector in your portfolio in the right increments can reduce risk without sacrificing returns. Whether through intentional deception or carelessness in protecting your best interests, advisors and brokers sometimes fail to recommend appropriate diversification of securities or advise investors to disproportionately concentrate their funds in a single asset class, sector or company. When these acts, through negligent management or malpractice by a broker or advisor, result in failure to diversify on behalf of an innocent investor and losses occur, the investor may be entitled to seek damages.

What are the Problems with Preferred Securities

In times of market crisis, similar to what have recently experienced, most preferred securities act more like common stock than fixed income. As a result, preferred securities miss the upward price appreciation that common stocks enjoy but are exposed to the downward declines. These investments that are traditionally thought of as income-producing vehicles lost significant value, performing far below their income generating alternatives.

Preferred stocks are traditionally marketed to risk averse and income seeking investors. The driving appeal of preferred stocks is the return from dividend payments. However, many preferred shares are callable, meaning that the issuing company can repurchase the shares at par value and pay no further dividends. If interest rates fall then companies have an incentive to call the security so preferred shares carry an inherent interest rate risk. Other risks are associated with the credit of the issuer, the potential for overconcentration in specific industries, and lower liquidity than common stock.

The $200 billion preferred stock industry has significant industry sector concentration risks. Companies can carry preferred stocks as equity on balance sheets so many regulated entities, such as insurance and financial institutions, choose to issue preferred stock instead of traditional debt. Nearly 72% of all preferred stocks come from the banking industry, insurance industry, or other financial service industry. Only a carefully constructed preferred stock portfolio can avoid the associated concentration risk.

Preferred stocks are a hybrid of debt and equity investments. Like traditional debt, preferred stocks carry preference over common stock for dividend payments and bankruptcy proceedings. Also like debt investments, preferred shares offer a fixed dividend payment similar to bonds. However, like equity, preferred stock can fluctuate in value, especially when the value of the issuing firm is low. Preferred stocks are given ratings similar to bond ratings but preferred ratings are almost always lower than bond ratings because preferred securities do not have the same guarantees for interest payments.

Investors holding preferred securities in their portfolios may have noticed drops in the investment values. If your financial advisor recommended a portfolio concentrated with preferred securities and your portfolio has incurred damages, you may be able to recover your losses.

REIT Issues in Securities Litigation

A REIT is an entity that owns and operates income-producing real estate and distributes the income to investors. REITs pool the capital of numerous investors to purchase a portfolio of properties which the typical investor might not be able to buy individually. To qualify as a REIT, a company must have most of its assets and income tied to a real estate investment and must distribute at least 90% of its taxable income to shareholders annually in the form of dividends. Investors depend on the sale of properties or listing for the return of their principal.

Most REIT shares are registered for trading on a national securities exchange. Publicly traded REIT shares are widely followed by securities analysts. Their share prices fluctuate with changes in the REIT's portfolio and economic conditions. Other REITs are referred to as non-traded REITs, as their shares are not registered for trading on any exchange. Investors in non-traded REITs who seek to sell their shares before the term of the investment must either resell their shares to the sponsor or sell in an inefficient secondary market, usually at severe discounts. Because non-traded REIT shares do not trade in an open market and are rarely the subject of analyst reports, investors depend on the disclosures made by the sponsor for information about the value of the REIT's shares. Non-traded REITS are typicaly illiquid, expensive, and underperform their traded counterparts. Non-traded REITs often pay 10% or more in commission to the salesmen and charge ongoing marketing expenses as high as 2-3%. As a result, the non-traded REIT will have to return as much as 12-13% to simply break even.

Under FINRA Rules, brokerage firms have an obligation to make only suitable recommendations and to fully disclose all risks associated with a recommended product, including the fact that REITs are illiquid products. Moreover, brokerage firms have a duty to conduct a reasonable investigation of the issuer and the securities they recommend before approving them for sale to their customers. In October 2011, FINRA issued an investor alert about public non-traded REITs, urging investors to perform a careful review before investing. The alert states that FINRA is issuing this alert to inform investors of the features and risks of publicly registered non-exchange traded REITs. If you are considering a publicly registered non-exchange traded REIT, be prepared to ask questions about the benefits, risks, features and fees. FINRA further advised investors to: “be wary of pitches or sales literature offering simplistic reasons to buy a REIT investment. Sales pitches might play up high yields and stability while glossing over the product’s lack of liquidity, fees and other risks.”

Investors purchasing REIT securities often were unaware of the risks and illiquidity associated with those securities, and sometimes were misled into believing that non-traded REITs are a safe, income-producing investment similar to high quality fixed-income securities. In some cases, an investor's REIT may have little to no value as the REIT has filed for bankruptcy protection. In other instances, an investor is unable to access the money placed in a REIT because of the illiquidity of the product. In either case, our law firm represents investors against the brokerage firms who recommended that they purchase REITs, and files claims to recover losses sustained and/or recession of the investment in the REIT. In many instances, an investor can maintain real estate exposure in well-diversified, low-cost, publically traded mutual funds, like Vanguard, with better performance.

What is Selling Away

As an investor, your stock broker or brokerage firm has an obligation to act in your best interests — this is called fiduciary duty. If you believe your broker has committed a breach of fiduciary duty, secure your legal rights with the help of a highly skilled securities attorney. We will analyse your case and aggressively pursue recovery of your lost investment. If you have been defrauded, entrust our law firm for experienced advocacy and legal counsel. We are selective in the cases we take in order to devote the right resources towards maximizing our clients' results. We will personally handle all aspects of your case from inception until the end of the case.

Selling away entails the sale of private securities that are not authorized by and not on the products list of a registered broker's or financial advisor's broker-dealer firm. Broker-dealers, however, are responsible for the outside business conducted by its financial advisors whether it approved it or not. Broker-dealers' supervisory responsibilities are extremely broad. The securities frequently sold, but not approved by the broker-dealers may include the following:

  • 1. Investments in privately held companies
  • 2. Promissory notes
  • 3. Real estate
  • 4. Tenants in common (TIC)
  • 5. Real estate investment trusts (REITs)
  • 6. Limited partnerships

Brokers sometimes sell away to avoid the scrutiny of their broker-dealers over questionable investments in which they place their own interests before those of their investors. Cases involving selling away often involve a broker who sold investment products in which he or she was paid an undisclosed commission or otherwise had a personal interest in. Because selling away is conducted without the authorization of or disclosure to a broker's investment firm, the securities involved do not benefit from the broker-dealer's due diligence. In circumstances in which selling away occurs, investors are typically unaware of the risks associated with the securities purchased. The financial advisor frequently receives as much as 10-15% in commissions for the types of securities that are sold away from the firm.

Selling away is not only unethical, it is a violation of Financial Industry Regulatory Authority (FINRA) rules. Investors who suffered losses due to a registered broker selling away may be able to seek damages through securities arbitration against the broker-dealer of the investment advisor who recommended the security. FINRA has regulations that restrict the external or outside business activities of registered brokers and financial advisors, including the transactions of private securities. FINRA defines private securities transactions as any securities transaction outside the regular course or scope of an associated person's employment with a registered broker-dealer firm.

If a broker wishes to sell securities outside of an investment firm's approved products list, he or she must provide the firm with written notice prior to participating in a private securities transaction; the broker-dealer may then decide whether to approve the sale or solicitation of the securities in question. Regardless of whether the broker-dealer approves the security or not, it assumes the responsibility for transaction oversight as if it was executed on behalf of the firm.

Selling away often stems from registered brokers who work in satellite offices for larger investment firms and have little oversight from or contact with their principal management. Although brokerage firms may not know that their agents are selling away, investment firms may be held liable for investor losses if it can be established that the broker-dealer should have known about a broker's outside sales activities, lacked reasonable supervisory policies to prevent and detect broker misconduct, or otherwise failed to act in the best interests of its investors.

What is Unauthorized Trading

Unauthorized trading is a common form of investment fraud in which a financial advisor or broker makes transactions via your nondiscretionary investment account without your explicit permission. Unauthorized trading often involves the practice of churning, in which a broker engages in an excessive level of transactions through a customer's account. This generates substantial commissions for financial advisors and brokers, but it also costs investors.

Most investors maintain nondiscretionary accounts with their investment firms. In a nondiscretionary approach, your financial advisor or broker may make investment recommendations but may not make transactions linked to your investments without your consent. Other investors choose to have discretionary investment accounts, which are managed by a financial advisor or broker who is authorized in writing by the investor to make decisions regarding the purchase or sale of securities. Financial managers of discretionary accounts still have a fiduciary duty to act in the best interests of and according to the investment goals and risk tolerance of their investors.