West Palm Beach Excessive Risk/Unsuitable Trading Lawyer
At the beginning of a relationship with a stockbroker, financial advisor, or investment counselor he or she should understand your investment objectives and risk tolerance. You may be asked to fill out a questionnaire when you open the account which, among other information, will seek to establish your investment objectives. You may even be asked to select or rank your objectives from a list such as the following:
- Safety of principle
- Safety and income
- Growth and income
- Aggressive growth
Completing such a list or ranking of your preferences can be a useful tool for investing but can also be used by unscrupulous brokers to justify transactions which are not necessarily in your best interest. When the broker fails to learn specifics about the customer, such as his or her: financial sophistication, investment experience, current and future income needs and and level of risk tolerance―the broker is not in a position to make informed and suitable recommendations to the customer. Often times, a lack of knowledge of your needs leads to excessive risk and unsuitable trading of your assets.
The Broker’s Professional Responsibility to Communicate with and Educate the Customer
In order to develop an appropriate investment strategy, the broker needs to determine whether the new customer understands the trade-off between risk and return, how much risk the client is willing to take in the hope of achieving higher returns, and whether the client who expresses an interest in aggressive trading and speculation realistically appreciates the risks involved and can afford the potential losses that might well occur.
The Risk-Return Trade-off
It is important to understand that in investing, the higher the potential return a particular investment has to offer, the greater the risk; conversely, a safe investment involving minimal risk will usually have a much lower earning potential. The risk-return trade-off is the principle that potential return rises with an increase in risk. In other words, if you expect to make a killing in the stock market, you’d better be prepared to lose your entire investment, or a good part of it. Most investors who are trying to build a nest egg to put the kids through college or to fund their retirement cannot afford this level of risk. Because being wiped out could be devastating to their family and future, the average investor is usually better off with a slower, safer, but hopefully steady rate of return.
Which Investor Category Fits Your Needs, Goals, Wealth, Income, and Station in Life?
A good financial professional, before making any investment recommendation to a customer, may also place a customer in one of several investment categories based on the customers overall objectives for their portfolio. These categories include:
- Conservative/low risk accounts – Focus on safety of principle, while generating income with relatively low risk. Depending on the customer’s investment objectives, it may also be appropriate to pursue growth through larger capitalized, blue chip companies which have a history of solid earnings and relatively low volatility.Trading costs in these accounts should be kept to a minimum.
- Investment/medium risk accounts – These make up the majority of investment accounts. This investor is typically looking for both short and long-term growth and is willing to assume a certain reasonable, but not excessive, amount of risk. This category of portfolio will include mostly medium risk investments, a buy and hold strategy, with occasional trading.
- Speculative/high risk accounts – Only appropriate for those investors that are looking for extraordinary returns, typically with short time frames., often through active trading. These accounts may involve extremely high risk securities with the risk of loss of a substantial portion or all of the principal invested.
The broker may fail to make appropriate recommendations because he or she has not learned the essential facts about a customer that disclose the customer’s investment objectives and risk tolerance. The broker may also make inappropriate recommendations in order to profit at the customer’s expense by trading excessively or churning of the account to generate commissions, making highly leveraged trades and generating excessive margin interest, and investing in very high risk securities to the client’s detriment. The broker may be held liable to the client for losses and associated damages in these cases.
Getting Legal Help for Stockbroker Wrongdoing
If your broker has lost excessive amounts of your money by recklessly investing it wildly speculative stocks or has knowingly frittered away your kid’s college fund or dissipated your retirement nest egg by generating commissions or other income for himself through excessively frequent trades, you may be able to recover your damages in a legal action against the broker.
To learn more and find out if you have a valid case against your broker for reckless or malicious handling of your account, contact the Boca Raton, Florida, law office of attorney Todd A. Zuckerbrod, P.A., a highly experienced and well respected securities attorney with nearly thirty years in the industry and a solid reputation for integrity and results. There is no charge for the initial consultation. Because of statutory time limits on making your claim, you should not delay; make the call as soon as you suspect fraud, excessive trading, or inappropriate risk-taking by your broker.