Financial advisors hold positions of trust with their clients, which can put investors at risk of losing money due to broker misconduct. When your broker’s misconduct caused you to suffer significant investment losses, you have the right to seek reimbursement for those losses from the broker or the brokerage firm that employed him or her. Recovering damages in claims of broker misconduct is incredibly complex.
The experienced investment loss attorneys at the Law Offices of Robert Wayne Pearce, P.A., are devoted to protecting the rights of investors. Robert has 40 years of experience as a trial attorney and has represented hundreds of clients in investment-related disputes. Contact us today for a free consultation.
Unauthorized trading is a common form of broker misconduct. According to the SEC, unauthorized trades are those made by a broker without the customer’s permission or authorization.
As a general rule, financial advisors must have a client’s permission or authorization to make trades in their investment account. How financial advisors obtain this permission depends on the type of investment account you have.
Non-discretionary accounts give investors more control over the investment account. If you have a non-discretionary account, your broker must get your verbal or written authorization prior to making any trades in your account. That means you are the final decision maker when it comes to your investments.
Non-discretionary accounts offer investors a more hands-on approach to investing. It may be daunting to consider giving your broker free reign over your investment account. If the thought of someone else being able to make trades in your account without telling you seems too risky, a non-discretionary account is the one for you.
The disadvantage of a non-discretionary account is that you tie your broker’s hands in the face of an unexpected investment opportunity. Rather than making trades immediately, the broker must wait for your consent, and by that time, the opportunity may have passed.
Discretionary accounts, on the other hand, give more authority to the broker managing your portfolio. Brokers managing discretionary accounts do not have to obtain authorization prior to making trades but they must have that authority given to them in a writing signed by the client. Investors place certain limits on the types of securities they wish to invest in or how to balance their portfolio, and the broker is free to trade within those limits without obtaining authorization.
If you have a busy lifestyle or wish to take a more passive role in your investments, a discretionary account will suit your needs.
The main benefit of a discretionary account is giving your broker the authorization to react quickly to investment opportunities without having to contact you first. You eliminate the risk of missing out on a great opportunity because you were unable to give consent fast enough.
Discretionary accounts do have some disadvantages. First, discretionary accounts typically require a higher minimum investment to open. Second, discretionary accounts charge higher fees than non-discretionary accounts since it requires the attention of a financial advisor to constantly monitor the account.
Even in a discretionary account, brokers are limited in their transactions. Brokers are bound by FINRA rules to only make trades that are in the customer’s best interest.
FINRA rules require brokers to act in the best interest of their clients. Despite this expectation, broker misconduct is not out of the ordinary. A broker could make unauthorized trades for a variety of reasons. The top reasons brokers engage in unauthorized trading include:
- Trying to increase their commissions by making excessive trades in the account;
- Preventing discovery of losses sustained in the investor’s account; or
- Seeking another personal benefit through the unauthorized transaction.
Regardless of the reason, unauthorized trading is strictly prohibited. If there are transactions that you did not approve on your monthly statement, it is critical that you contact an attorney as soon as possible.
FINRA has reported a slight decrease in unauthorized trading claims brought against brokers in recent years, shrinking from 263 claims in 2017 to 190 claims in 2020. Unauthorized trading is a form of broker misconduct that is difficult to prove. Brokerage firms argue that if a customer does not object to an unauthorized transaction immediately, that can be interpreted as ratification of the transaction.
Defense attorneys for brokers and brokerage firms contend that by receiving monthly statements outlining the transactions made in their accounts, investors are the ones responsible for monitoring this activity and file a timely complaint when an unauthorized transaction is made.
If you suffered investment losses because of unauthorized trading on behalf of your financial advisor, contact an investment losses attorney at The Law Offices of Robert Wayne Pearce, P.A., to see if you are entitled to damages.
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