What is Financial Advisor Malpractice?

financial-advisor-malpractice In some cases, investment fraud claims are straightforward. For example, there may be overwhelming evidence that proves that a financial advisor fabricated documents, forged their client’s signature, and lied to the client’s face about the status of an investment. In this type of situation, there is no doubt that level of investment fraud has occurred. However, financial advisor malpractice claims are often far more complex.

Indeed, malpractice claims are often among the most complicated legal claims. These claims generally do not involve the allegations that a financial advisor was ‘stealing’ from a client, but allegations that, through negligence, inattention, lack of skill or lack of care, a financial professional has cost their client a substantial amount of money.

To be clear: Financial advisors can be held legally liable for malpractice. Registered financial advisors have a fiduciary duty to their clients. Not only does this duty require financial advisors to put their clients’ interests ahead of their own personal interests, but it also requires them to manage their clients’ accounts with an adequate level of skill and care.

Regardless of intentions, the victims of financial advisor malpractice often suffer severe financial losses. As such, these victims deserve fair compensation. Here we detail five of the most commonly occurring types of financial advisor malpractice.

Five Examples of Financial Advisor Malpractice

  1. Your Investments Do Not ‘Fit’ Your Needs

    No two investors are exactly alike; each investor has their own unique circumstances, needs and goals. Financial advisors have a professional obligation to understand the needs and goals of their clients and to execute an investment strategy that works in accordance with these goals. To achieve this, a financial advisor must fully understand a client’s risk tolerance and must use that information to develop a comprehensive investor profile for the client. Then using that profile, a financial advisor must only recommend investment opportunities that are truly suitable for their client’s financial position. A financial advisor who recommends an unsuitable investment opportunity to a client is guilty of malpractice.

  2. You Account is Not Properly Diversified


    Beyond recommending appropriate investments, a financial advisor also has a professional duty to ensure that all accounts are properly diversified. What constitutes proper diversification will depend on the financial position and the desires of the client in question. Remember, when it comes to investing, there can be too much of a good thing. An over-concentration of investments will dramatically increase a customer’s overall risk. It is important to ensure that investments are properly balanced.

  3. You Are Borrowing Too Much to Make Trades

    In some cases, it makes sense for an investor to purchase an asset on margin. To be clear, purchasing something on margin means borrowing funds from the brokerage or financial advisor in order to complete the transaction; in other words, going into debt. While this comes with certain benefits, it also comes with both heightened risks as well as additional transaction costs. Financial advisors have a professional responsibility to ensure that their clients are not buying assets through the excessive use of margin.

  4. Your Financial Advisor is Constantly ‘Turning Over’ Your Account

    Churning, or excessive trading, occurs when a financial advisor recommends or conducts trades on a client account either solely, or largely, to generate additional commissions from their own gain. Of course, this means that the financial advisor is not conducting the trade in the best interests of the client, or in the furtherance of a broader investment strategy. Churning is highly unethical and it can quickly destroy the value of a customer’s investment account. It is imperative that investors regularly review their account statements and that they examine how much they are paying in commissions and investment fees.

  5. Your Financial Advisor Was Asleep at the Wheel

    Finally, a financial advisor may be guilty of professional malpractice if they are simply not giving a client the appropriate amount of attention. Maybe the financial advisor is distracted or their skills have slipped; regardless, this is a form of negligence. It may sound simple, but financial advisor negligence can do tremendous damage to a victim.

Do You Need Legal Advice?

If you have been the victim of financial advisor malpractice, our investment fraud attorneys are standing by, ready to help. At the Sonn Law Group, we have helped many financial malpractice victims recover the full and fair compensation that they deserved. To request your free initial legal consultation, please call our office today at 1-844-689-5754. We handle all investment fraud claims on a contingency basis, meaning we do not collect a fee unless we win or settle your case.