I Lost Money in the Stock Market. Is my Financial Advisor to Blame?
I finished my undergraduate degree and started working in the financial services industry in 2004. I found many people I spoke with were hesitant to engage in financial planning or investing. This was only a few short years after the Tech Bubble burst, and many people were still leery about putting money back in the stock market. Others were downright hostile towards my industry. In 2008, when the Financial Crisis again hit investors hard, I again dealt with client anger and complaints regularly as a compliance supervisor for the brokerage firm. After I left my financial advisor role former clients would call me asking if I could take their accounts back because, “I was making more money when you were taking care of it.”
I understand where clients are coming from. Clients work hard and make sacrifices to save and invest. When clients first meet with a financial professional, they often make significant and difficult changes in their spending habits in order to systematically save and build a nest egg or reach a savings goal. Financial markets are complex. It is often difficult to know if the investments they made with a financial advisor are losing value because of bad advice, or if there was simply nothing that could be done. When markets are doing well, it is easy to praise the advisor. When they do poorly, it is also easy to blame that same advisor. The difficult question for investors is this; does my advisor deserve the praise OR the blame for my investments?
The answer is not straight forward. Generally, when the markets are doing well, investors (and by extension the financial professionals who advise them) do well. When the markets are not doing well, investors also do not do well. This concept is not a difficult one to understand. The difficulties come in gauging an investor’s EXPOSURE to certain markets. Financial regulations require that financial professionals making investment recommendations to investors take certain factors into account. Age, Income, Investable Assets, Net Worth, Investment Experience, and Tolerance for Risk are just some of those factors. Financial professionals and advisors must make recommendations which fit the investor’s profile. If a high risk, relatively young, and experienced investor looses twenty percent in a bad market downturn, that is to be expected. If retiree on a fixed income with limited assets, limited investment experience, and very risk adverse looses twenty percent, there is likely a problem with the advice the advisor gave that investor.
The above examples give two extremes, but in reality, there are a range of investors in between. So how can you know if you received bad advice?
First, did the financial advisor take the time to understand you, your financial situation, and what you were trying to accomplish, or did he or she simply present you a product or service without much discussion? An advisor should understand your financial situation and goals before making any recommendations.
Did the financial advisor take the time to discuss your options and review how the products and services he or she was offering worked? An advisor should make sure you understand what your options are before making recommendations.
Did you understand the products and services the financial advisor was recommending? If not, did you ask questions which the advisor either addressed inadequately, or not at all? An advisor should always take the time to address any questions you have.
Advisors are not mind readers. If the advisor has explained the products and services, and you state you understand when you did not, it will be difficult to say the advisor made a bad recommendation later.
Did you express concerns, and the advisor did not address them or down play them? An advisor should always take your concerns seriously when making recommendations on your money.
Did you know about the investments your advisor was making for you? If your advisor is making investment decisions for you without you having to pre-approve them, then the advisor has discretion over your investment account. Discretion requires a written contract between you and your financial advisor or financial services firm.
In summary, simply losing money in the stock market does not mean your advisor is to blame for your market losses. The real question is not whether you lost money; but rather, whether the advisor recommended the appropriate investments and market exposure for your specific investor profile.
The information contained in this blog is general in nature and should not be viewed, and is not intended by the author to be viewed, as legal advice. For specific legal advice, please discuss your situation with a qualified attorney.