“She never explained anything”: I’m a senior and lost $100,000 in the stock market this year. Can I sue my financial advisor?

I am a senior and suffered huge losses of $100,000 in the recent stock market turmoil. Can I sue my financial advisor? I understand the dynamics of the market ups and downs and have experienced it before.

However, the market was different during this period as both technology stocks and others were badly hit. I’ve told my financial advisor that I’m retiring months ahead of any of this.

As my account was losing she did nothing to warn me that given the current situation it might be a good idea to move my assets to another area to cut the losses – and come back at a later date when the situation has stabilised.

I have now found out through other advisors I have consulted that there is a term called “stop loss” to do just that, stop the loss. They also mentioned that she had failed in her duties as a counselor. She never explained anything like high or low risk management or any other aspect of the market.

The only time we had contact was when I contacted them about buying into different stocks. Other than that she never called about anything related to my account. Can I sue and if so, how do I do that?

Feeling like a sucker

Dear FLS,

There are a lot of hurdles you would need to clear in order to have a legal case to sue your financial advisor and from what you have said here it doesn’t look like they have been met. Every investment has some risk and the S&P 500 SPX,
Dow Jones Industry Average DJIA,
and Nasdaq COMP,
have suffered significant losses this year: down 19%, 16% and 27.8%, respectively.

Last year you would have been a pig’s back and consequently a big fan of your financial advisor’s strategy. But no consultant is perfect. And no one can – despite previous predictions – predict the market. Even Warren Buffett, the Oracle of Omaha, makes mistakes. And he will acknowledge her when he does. That goes for your financial advisor—and for your good self.

But back to your question about suing your advisor. You would first have to prove that you entered into a fiduciary relationship with her. That is, she has promised to put your interests ahead of hers and she has breached her duty of loyalty. They would also have to demonstrate a direct link between their actions and your losses and show that those losses were foreseeable.

The financial industry regulator has issued regulations to help ensure investor protection. Read more here. The Gibbs Law Group defines the difference between outright fraud, wrongdoing and negligence and gives some examples of the latter, including improper investments, failure to disclose important information and over-concentration of investments.

Still, don’t wait for your day in court. Most investment contracts contain an arbitration clause. Finra and the Securities Industry and Financial Markets Association (Sifma), a trade group representing securities firms, banks and wealth managers, argue that arbitration saves all parties valuable time and money and helps ease smaller claims from retail investors.

A good guide

A good advisor should understand your circumstances “and only recommend financial products that are appropriate for your age, your investment goals, your experience and your desired level of risk,” writes the law firm in a blog on the subject. “But careless advisors will sometimes steer you towards risky or inappropriate investments in order to get higher commissions.”

Diversity helps protect investors from excessive losses, but does not prevent them. “Over-investment concentration occurs when a financial or investment advisor’s failure to diversify a client’s portfolio, thereby exposing that client to undue risk of loss,” she adds. Your losses may relate to a variety of stocks as the overall market took a tumble in 2022.

You may be misunderstanding the concept of a “stop loss” and how such an order is created. This is an order from the investor, perhaps in consultation with his broker, to sell a stock when it falls to a certain level. But while this can stop the bleeding in your portfolio, it could also cause you to sell too many stocks at a lower price without waiting for an eventual recovery.

There will be a paper trail, but your advisor is unlikely to be sued for not reaching out to you as often as you would like, even in a turbulent market like this. Sometimes the best action is no action. You lost $100,000. We don’t know if that’s 100% or 10% of your total portfolio. In general, as you approach retirement, your investments should be more conservative.

Of course, if you were to consult a lawyer, you would have to provide more details. However, it appears from your letter that you are upset about your paper losses and your advisor takes the blame. But notwithstanding the terms of the lawsuit against your adviser outlined above, there are two people in this relationship and in many cases the responsibility goes both ways.

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