“One Size Fits All” Does Not Apply in the Investment World
November 8, 2011 - MarcWites
“Risk tolerance” refers to your comfort level with the level of risk associated with investments in your portfolio. Some people cringe at the thought of investing in anything which does not result in a guaranteed rate of return, no matter how modest. Others relish the thought of putting their money into cutting-edge companies which could be “The Next Big Thing,” or which could fail dramatically. Most of us are comfortable with investments whose risks fall somewhere else along that spectrum. Furthermore, the older a person gets, the more important it is to steer away from risky investments unless they are fortunate to have funds which they can afford to gamble – and potentially lose.
Stock Brokers or Investment Advisors
Virtually all stock brokers or investment advisors will quiz you about your “risk tolerance” and your short and long-term goals before advising you what mix of investments is best for you, under your particular circumstances, your present finances and your financial objectives. A good stockbroker will propose a mix of investments which meet these goals. Unless you have absolutely no tolerance for any risk, many investments run the risk of intermittent losses, such as those resulting from dips in the stock market or other market forces, although they are considered good long-term investments.
What happens, though, when you have clearly communicated to your broker the level of risk that you are willing to shoulder, and you believe he or she convinced you to put in your money in high risk investments which exceeded the risks with which you were comfortable? What happens if the loss is not just consistent with the current state of the stock market or other companies in the same industry, but completely wiped out the funds you put in the investment? While not all investment losses can be blamed on wrongful advice, your stockbroker could be liable for your losses if the investments were “unsuitable” to your risk tolerance and investment goals. A recommendation by a broker that you invest in “unsuitable” products is a violation of Federal law, and you may have a valid legal claim for securities fraud and may be able to recover your losses.
Specifically, your stockbroker or investment advisor may be financially responsible for your losses if they counseled or urged you to put your money in investments which, at the time the advice was given, were inconsistent with your risk tolerance. For example, if you are an individual approaching or in retirement who told your broker that you want to preserve your assets and create a steady flow of income for the future, your investments should be concentrated in bonds or low-risk money-market funds, not private offerings of new companies, or other high-risk investments such as options, futures or other complicated – and confusing — investments. An investment advisor must have a “reasonable basis” for recommending any particular investment to you.
Financial losses due to market conditions?
If you believe that your financial losses were not caused by normal market conditions, and that they exceeded those with which you told your broker you would be comfortable with, you should consult with an attorney who specializes in cases involving stockbroker wrongdoing. Your attorney can review your documentation to determine whether or not there appears that the recommended investments were unsuitable to your needs, and whether your stockbroker may be financially responsible for your losses.