Take the example of a surgeonfrom Chicago whoretained our law firm afterlosing over $700,000 inless than 12 months as aresult of recommendations made by hisbroker. Previously, he had been mostlyvested in conservative securities. But hisstockbroker began offering investmentsin a series of biopharmaceutical limitedpartnerships. After purchasing all ofthe recommended investments usingfunds from his conservative investments,his portfolio was now dominatedby a dozen of these high-riskand speculative limited partnerships.Within a year, the surgeon lost most ofthe value of his portfolio.
This scenario begs two questions.First, why did the broker make theserecommendations to his surgeon-client?Second, why did the surgeon agree tohis broker's recommendations? Byunderstanding the answers to thesequestions, other doctors may be able toavoid a similar fate.
Brokers receive large commissionsfor selling certain types of investments.These include limited partnerships,annuities, certain mutual funds,and investment strategies that includehigh levels of activity, such as shorttermtrading. As a result, brokers aremotivated to find individual investorswilling to engage in these transactions,because most rarely have thespecial training, the researchresources, or the time to thoroughlyevaluate, design, and monitor anappropriate portfolio.
The title "stockbroker" has givenway to more authoritative, and oftenmisleading, designations such as "financialadvisor" and "investmentcounselor." Yet, they are not CertifiedFinancial Planner practitioners™,a designation held by specially licensedinvestment consultants. Brokersare not always held to the samedegree of conduct that governs registeredinvestment advisors.
There are vital things you shouldexpect from your broker. They shouldonly make recommendations that aresuitable for your objectives, financialneeds, and financial circumstances.They should explain the pros and consof all investments they recommend,and not make transactions on youraccount authorization. They shouldnot recommend investments with illusorybenefits, such as tax-advantagedsecurities and variable annuities.
The good news is that investorswho lose money due to broker misconducthave a legal remedy. Investorscan seek to recover their losses,as well as attorneys' fees and punitivedamages in the case of egregious brokermisconduct.
The aforementioned surgeon wastold by his stockbroker that the losseswere not caused by any wrongdoing.Initially he believed he had norecourse, but then learned about thearbitration process. After filing anarbitration proceeding against hisbroker and the brokerage firm, thecase was settled, and the brokeragefirm agreed to rescind the transactionsand repay him the money lost.Just as physicians stay current withmedical advancements, be sure tostay current with your investmentportfolio by asking questions andmaking sure you understand how abroker is investing your money.
is a partner with the law
firm Block & Landsman in Chicago, Ill. The
firm's primary practice is focused on investor
rights and other complex litigation matters.
The principals of Block & Landsman have
more than 25 years of experience representing thousands of
clients in protecting their clients' assets and interests. He
welcomes questions or comments at 312-251-1144.