While stockbrokers often call themselves “financial advisors,” there is a type of professional who is officially called an “investment advisor.” There is a difference between the two, and it could have a huge impact on individual investors because when things go wrong the difference between the two becomes stark and meaningful.

Stockbrokers

• Stockbrokers are regulated by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that sits under and is subject to SEC oversight
• A stockbroker can effectuate a trade on behalf of a client
• Some stockbrokers are fiduciaries by operation of law

Investment Advisors

• Investment advisors are regulated by the SEC or their local states – depending on how much money they’re managing
• An investment advisor makes a recommendation that is ultimately carried out through a broker dealer
• All investment advisors are fiduciaries as a matter of law.

Almost every brokerage firm requires clients to agree that any disputes will be heard in a FINRA-overseen arbitration process, as opposed to in a court of law. FINRA’s arbitration process isn’t perfect, but it has made great strides toward being a fair, efficient, and fairly priced forum. FINRA requires its members, including firms and individual brokers, agree to arbitrate if the client requests, even if the firm’s customer agreement doesn’t require arbitration. If a client proceeds in a FINRA arbitration, one of the best aspects is that the hearing will be held in a FINRA hearing location closest to the investor’s residence, with the brokerage firm subsidizing a significant portion of the arbitration forum expenses. FINRA has hearing locations throughout the country and are convenient for the vast majority of Americans.

Investment advisors, on the other hand, are free to include whatever dispute resolution provisions they want in their client agreements. They can require that a client travel across the country in order to pursue a recovery. They can require the client use a dispute resolution forum that’s tremendously expensive (some require tens of thousands of dollars to be deposited before they’ll even start administering the case), to the point where it’s simply not economical to pursue claims under $100,000. They can require that the dispute be heard under some other state’s law, when the client had every expectation that the advisor providing services would be subject to the investor’s local law. The bottom line is that investment advisors can make arbitration so difficult or expensive that only large claims could be heard, and even then, at great expense and difficulty to the investor. Those investment advisors use their arbitration clauses as a shield against potential claims.

The number of investment advisors is growing, and growing quickly. Where there were slightly more than 10,500 registered investment advisors in 2012, that number has grown to more than 14,000 in 2021. At the same time, the number of firms serving as broker-dealers alone fell from 3,545 to 2,921 over the same period. McKinsey reports that registered investment advisory firms represent the fastest growing category in the US wealth management market since 2016. There’s no doubt that the investment advisory space is growing by leaps and bounds, and there’s no doubt that the lack of a standardized dispute resolution forum for those increasing number of investment advisors means that an ever-growing number of investors could have unexpected difficulty in seeking recovery if they have the misfortune of having dealt with an investment advisor who did not take their fiduciary duty seriously. Well-informed investors using investment advisors would do well to check the dispute-resolution terms in their account agreements before any sort of problem arises. If the terms seem offensive, or heavy-handed, there may be an opportunity to renegotiate the terms in order to keep the business with that advisor.

An investor who was trying to be careful with their money likely spent time researching to find a well-regarded, trustworthy financial advisor. If the investor later has questions about whether they made the right choice or not, it is best to address the question without delay. If the advisor’s answers are unsatisfactory or just plain confusing, we stand ready, willing, and able to work with you to figure out whether you were the victim of a lousy market, or a lousy advisor. If it turns out we believe the advisor is at fault and responsible to you, we’ll work with you to determine the best, or perhaps only, avenue to pursue a recovery. Our initial review is performed at no cost to you, though if we require the use of an outside expert, we’ll talk to you about that expert’s cost before we retain them.

Time is of the essence in these situations. If you have concerns or questions, reach out now to request a consultation, call us at 216-696-1422, or visit Hugh’s bio for his contact information to reach out to him directly. And, for more information about investor claims and securities fraud, visit our partner website, StockMarketLoss.com.

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If the market is down, why wouldn’t we be flooded with calls from angry investors asking for help?

The answer is simple: most investors understand that markets go up and down. They also understand that a well-diversified portfolio should recover its value as the market goes back up. In times like these, financial services professionals repeat the mantra, “Stay the course. Wait for the market to come back.” And it is good advice if the portfolio really is diversified, and there aren’t needs to liquidate and raise cash while prices are depressed. However, the problem arises when that advice to stay the course is a little more than the financial advisor praying that his poor selections will rebound in a way they almost certainly won’t. In other words, “Stay the course” can often mean “Please, please, please let these lousy investments rebound so you don’t realize I gave you terrible advice.”

Considering our experience with these cases, we know there’s typically a six to nine-month gap between a market event and a meaningful rise in cases. It usually takes that long for people to realize that “Stay the course” simply meant “Wait to sue me.” Most commonly, as the market rebounds and people start talking about their accounts are getting back to where they were previously, or that they are seeing additional growth, those investors who have claims against their brokers wonder why their accounts aren’t seeing the same activity. Concerned, these investors will start pushing their financial professionals for answers and will often receive the standard response, “You have to wait and be patient – your accounts will come back.” At some point, usually as their friends are solidly back into gain territory, those investors will begin to realize that their accounts are not going to come back. With this realization, they want to know why and if anything can be done.

What’s an investor to do when he or she is told to stay the course?

A good place to start is determining whether the investment portfolio is actually diversified. Here is a tip: among the first pages of many brokerage account statements are summaries of the account’s makeup. Note what percentage of the account is held in equities, fixed income, alternatives, and cash. While this is an oversimplification, look for an unusually high or low number in a particular category or security. An account comprised 100% in equities is typically considered aggressive (volatile) and an account comprised 100% in fixed income is typically considered conservative. To be fair, in most circumstances, an account shouldn’t be 100% in any category. The best way to avoid risk is to build a mix of equities, fixed income, and cash (and sometimes alternatives). An 80-year-old investor who needs income likely shouldn’t have 80% of their portfolio in equities. A 35-year-old investor who’s saving for the long term probably shouldn’t have 90% in fixed income and cash. Similarly, having more than 10% in any particular security carries a particular risk associated with the concentration.

The bottom line is that the failure to diversify and build an appropriate portfolio can provide a foundation for an investor’s claim against their broker or investment advisor.

Sometimes, however, the account can be well-diversified, but the individual investments selected are inappropriate. We’ve seen a variety of investment products over the years that promised safety and were almost certainly guaranteed to fail. The broker sold them because they didn’t understand the true nature of the products and believed the marketing hype themselves, or they wanted the higher commissions those products paid. It’s far more difficult for an investor to determine that a particular bad product, or series of products, is to blame for the poor performance of the account.

You tried to do the right thing by hiring a high-quality financial advisor, but now you wonder if you’ve become the victim of an unscrupulous one. You have nothing to lose by reaching out to discuss your situation. We’ll talk it through, review the appropriate provided documentation, and let you know whether we think we can help you recover your lost savings. Time is not your friend here as there are time limits that apply to your ability to bring a claim. If you have a question now, reach out now.

Please reach out to request a consultation or call us at (866) 932-1295. And, for more information about investor claims and securities fraud, visit our partner website, StockMarketLoss.com.

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There are certainly examples of rogue brokers running off into the night with their clients’ investments in hand. Happily, though, outright theft like that is a rare thing. So what happened when the number of shares you had yesterday disappeared overnight? In nearly every instance, you experienced what’s called a “negative split.”

The Split

Before going further, a reminder of how stocks are valued is useful. Each share of stock represents an ownership in the issuer, including its net assets and profits. We could go on at length about how stocks are valued, but in an ideal world, they’re priced based on an equal division of the net value of the company across the number of shares outstanding, modified by the market’s expectation of how the company will do in the future. If there are 100 shares, the value is divided by 100; and if there are 1,000 shares, the value is divided by 1,000. While this is an incredibly simplistic view of things, it’s necessary to understand how splits affect stock prices.

The news is certainly full of reports of stock splits – Apple comes to mind – where a number of new shares are issued for every old share held. Apple recently announced a four-for-one split. Thus, an investor who had 100 shares of Apple before the split would end up with 400 shares afterwards. Since the number of outstanding shares grows four-fold under that example, you’d expect the new per-share price to be ¼ of what it was before the split. But, since stock splits are typically a good sign of a company’s health, the markets tend to apply premiums to the post-split shares and they’ll often trade for more.

The Reverse Split

What, then, is a “reverse split?” It’s the opposite of a split. Instead of issuing more shares, the company issues less.

So, for example, a one-for-ten split would result in a situation where an investor who had 100 shares of Company X before the split would end up with 10 shares afterwards.

In that example, one would expect that a 10 – 1 reverse split would cause a 10x jump in the price of the stock (since there would be a tenth of the number of shares outstanding after the split). But reverse splits are often a negative sign of the issuer’s health.

Where the market often applies a premium on newly split shares, it tends to apply a discount on shares of companies undergoing a reverse split. Thus, the post-reverse split shares certainly trade higher than they did immediately before the split, but at a discount compared to the pure mathematical expectation. Thus, the per-share price after the reverse split might only be 9x instead of 10x.

Which brings us back to the start: the investor (or you) saw a higher per-share price with a lower number of shares. There was no theft involved.

If the investor checks the total value of their investment, it will likely be similar to what it was immediately before the split. But, and that said, the discount often applied to post reverse split stocks will result in the total investment value dropping to some degree.

How to Check for a Reverse Split

If you’re reading this because it seems your stock is valued much higher than it was yesterday, but you have far fewer shares than you did, do a quick Google search for the name of the issuer. If you see reports of the issuer having undergone a reverse split, you’ll know that nobody stole your stock. Instead, you simply have fewer shares in what’s likely a struggling company. The total investment value is almost certainly close to what it was yesterday.

But, if there are no reports of a reverse split, and a review of your statement shows that your shares were transferred elsewhere, there could well be a problem. If you didn’t authorize the transfer, it’s possible you have a claim against your financial advisor. We’re here and ready to help: please don’t hesitate to give us a call to discuss your experience and we’ll see what we might be able to do to help you recover your losses.

Blog originally posted on stockmarketloss.com

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