Stockbrokers and investment advisors have a duty to provide accurate and complete information to their clients. Investment advisors are regulated by the Securities and Exchange Commission (SEC), which sets standards for the conduct of stockbrokers, dealers, and investment advisors.
Investment fraud occurs when a financial advisor provides inaccurate, incomplete, or biased information in order to draw business or manipulate the market. The first type of investment fraud occurs when an investment advisor provides biased investment advice. If the advisor steers clients toward or away from a particular investment based on bias, this violates his fiduciary duty to the client. This bias may be prompted by an ownership interest in the company at issue or in a competing company.
Investment advisors have a duty of loyalty to their clients, such that they should not deal in stock or with a client if it presents a conflict of interest. This rule applies regardless of whether the advisor feels he can exercise judgment independent of any personal bias.
Investment advisors must also perform adequate and reasonable research before recommending or advising against a particular stock. If a client loses money on a bad investment because an investment advisor recommended the investment without having done sufficient research, she may seek recovery through a professional negligence action.
Stockbroker Failure to Perform
Even if an investment advisor does not have an improper motive to manipulate the market or draw business, stockbroker malpractice may still occur if he fails to fulfill one of the duties inherent in his position. For instance, stockbrokers are obligated to execute orders promptly, disclose material information, charge reasonable prices, and disclose conflicts of interest.
The investment advisor must also find the best deal for the client. Investment advisors are required to exercise independent professional judgment to assess an appropriate risk level for their client while identifying the greatest likely gains at that risk level.
Even so, advisors are required to have the client’s confirmation before investing in stocks, bonds, or mutual funds. If investments are purchased on credit, the advisor must make a full disclosure of all credit terms. Failure to satisfy any of these duties may result in a claim of stockbroker malpractice.
Investment advisors and stockbrokers may gain access to inside information that would give them an unfair advantage in participating in the stock market. The law forbids them from making trades based on private material inaccessible to the public. Accordingly, brokerage houses are tasked with taking appropriate precautions to ensure that privileged information is not disseminated to employees, and that trading restrictions are imposed on their employees just in case information is leaked in spite of precautions.
In cases of stockbroker negligence, the goal is to put the injured party back to the position she would have been in had the stockbroker performed his job competently. This may mean reimbursement for a loss or compensation for a missed opportunity for profits. It is imperative to have an experienced attorney consider whether there are other potentially liable parties as well, such as the stockbrocker’s employer or insurer.