Is Your Broker to Blame for Excessive Losses in the Stock Market?

The last few months have been a difficult time for many investors. The stock market has taken a major dive, closing out 2018 with the worst performing December since The Great Depression. With so much volatility, it’s crucial that investors have a carefully planned portfolio with an adequate amount of diversification. Above all, that portfolio should match the individual investors risk tolerance and investment objectives. That match must be valid from the day it was made until today. A portfolio that worked for an individual investor in a bull market may be a terrible match for that same person in a bear market.

Has Your Broker Diversified Your Investment Portfolio?

To paraphrase Warren Buffet, in a low tide you see who’s wearing a bathing suit and who’s naked. Accordingly, the stock market’s recent volatility and swing downward has exposed a lot skinny-dippers. The problem is, many of those skinny-dippers were unaware that’s what they were doing until it was too late. To speak literally now, the recent market downturn has shown many investors that their portfolios were not adequately prepared — that they were either not sufficiently diversified or otherwise contained excessive risk. Only they didn’t know they had all this risk until the market pointed it out. After all, we’ve all been swimming in a high tide for months and months (oops, there’s that darn Buffet metaphor again!).

Investments Must Be Suitable for Investors

In addition to not having a clear idea of how much risk and diversification is contained in their portfolio, many investors are not aware that their stock brokers have a fiduciary duty to maintain what’s called a “suitability match” between an investors and his or her investments. We touched on this above, but all that means is that investments in a given account must be suitable in a general sense (ie, legitimate and reasonable investments) as well as in a strictly individual sense (ie, suitable for one investor in particular, based on their investor profile, risk tolerance, and investment objectives, etc.). The final sense in which investments must be suitable is that they must continue to match the investor’s profile, even when the market fluctuates — or especially when the market fluctuates. Think about it. What good would a portfolio designed exclusively for bull market conditions do when things took an ugly turn? The portfolio would tank, obviously. Now we know why it’s so important that, not only is a portfolio diversified, but that the broker supervising it keeps an eye on things as market conditions change.

Suitability Changes Over Time as Markets and Investors Change

And change they have. Unfortunately, many investors woke up in the new year with a major hangover — in their investment accounts. Some of that may be the natural risk that comes with investing in the stock market — and some it might be broker negligence or misconduct. It can be hard to tell. But most of us have a feeling when we’ve lost too much money… Something just feels wrong. That’s when it might be time to have an accountant or attorney or even another broker look over your investment statements and account holdings. Because it might be the market that’s responsible; but it might also be your broker who’s gone south on you.

Pennsylvania & New Jersey Securities Litigation Law Firm

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If you or someone you know has been a victim of investment fraud or broker misconduct, please contact our securities litigation team immediately for a free consultation at 215 462 3330 or by using our online contact form.