Misconduct by Financial Planners

Authored by , LegalMatch Law Library Managing Editor and Attorney at Law

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What Is Financial Planner Misconduct?

When a client puts a stockbroker or other financial planner in charge of their investments, they are placing that individual in a position of great trust: the financial planner is often entrusted with a client’s financial security. Unfortunately, being put in such a powerful position can tempt some people to abuse that power or act carelessly.

How Can Financial Planners Abuse Their Power?

There are many ways in which financial planners can abuse their position of trust. First of all, a broker has a legal obligation to act in the best interests of his or her clients. A stockbroker breaches this duty by recommending investments inconsistent with their client’s investment goals or financial interests. The stockbroker must be a direct cause of the client’s injury.
Some financial planners will also trade to earn commissions. However, they are obligated to recommend stock on its own merit, not based on any additional financial reward that they might receive.

One of the most common forms of financial planner misconduct is known as “churning” – it is when a broker induces a client into frequent trades, thus increasing their commissions. There are many other types of misconduct, but they share a common feature: they serve to funnel more money to the broker to the detriment of the client.

Are There Any Legal Defenses A Financial Planner May Have Against A Malpractice Suit?

If the client’s stock broker were replaced with any other stock broker the end result would be the same: loss of the investment. In other words, if the stock broker didn’t do anything wrong compared to any other stock broker, than the client’s stock broker cannot be responsible for the injury.

Losing money on an investment is not, in itself, evidence of misconduct. All investments carry some inherent risk and if the stock broker is not the cause of the harm than the stock broker cannot be held liable for the lost investment. 

Finally, the financial planner may have contractual provisions in the agreement with the client to limit liability in case of financial injury. One of these provisions may be assumption of the risk: the client knew about the turbulent nature of the market but wished to proceed with the investments anyway.

What Should I Do If I Suspect Financial Planner Misconduct?

If you suspect that you have been a victim of misconduct, you will probably be entitled to get at least some of your money back. The first thing you should do is contact your financial planner in writing, explaining your concerns, and keep all copies of correspondence between you and your broker. If this does not resolve the issue, you should contact a finance attorney.

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Last Modified: 10-22-2012 03:28 PM PDT

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