With the recent developments in the financial industry and the significant losses incurred by both individual and institutional investors as a result of complicated derivative securities, it is a good time to revisit one of the obligations and duties that brokers owe to their clients.
In general, brokers have an obligation to their clients of fair dealing characterized by the high standards of honesty and integrity of their profession. Inherent in this obligation is a duty of brokers to determine whether or not certain investments are “suitable” for their clients based upon their clients’ financial situation, investment objectives and risk tolerance. In other words, securities brokers are under a duty to recommend only those securities that the brokers reasonably believe are suitable for the customer. Brokers must have a reasonable basis for their recommendations and must consider the specific risk tolerance of their client as related to that client’s investment objectives in determining whether or not a specific investment is a reasonable investment.
Whether brokers are just recommending a single investment product to a client or are relied upon to by their clients to determine an appropriate strategy or asset allocation for a client’s portfolio (the amount of money an individual has in certain investments in his or her portfolio), brokers have a legal obligation to understand the risk tolerance and investment objectives of the client as well as the nature of the investment vehicles that he is recommending. Unfortunately, over the past several years, it has become clear that many brokers have fallen short of these obligations to their clients on both counts.
Individuals and institutional investors with little to no risk tolerance and investment objectives of capital preservation and liquidity were placed in complicated derivative investments such as auction-rate securities (“ARS”), interest rate swaps and collateralized debt obligations (“CDO”) that they simply didn’t understand and were inappropriate based upon their investment objectives and risk tolerance. In many instances, brokers simply misrepresented the inherent risk involved with these securities or failed to disclose the nature of the risk involved.
Further, as evidenced by the collapse of the auction-rate securities market, it has become clear that in many instances the brokers themselves did not have a basic understanding of the complicated investment vehicles there were recommending to their clients. In many instances, these brokers were simply pushing the sales of these investments based upon pressure from the sales side of the firm. Certainly, it is very difficult to provide “reasonable” investment advice when the broker has no true understanding of the risks of the financial instruments he is recommending.
With the recent settlements in the areas of ARS and CDO’s, including the recent $550 million settlement by Merrill Lynch, individual and institutional investors who believe they may have been mislead into purchasing these types of securities should be encouraged to consult attorneys with expertise in the matter to discuss their case and options.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions, and have aided clients who have been the victims of financial adviser abuse, unsuitable recommendations, and scams. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their investment problems. For further information, please contact us.