New York Securities Fraud Lawyers Blog
The alarming stock market decline on Monday, August 5, 2024, is a stark reminder of how important it is to plan for your future by educating yourself on the steps you can take to protect your assets, and how your financial advisor should be handling your account. Financial advisors must abide by industry rules and standards. Specifically, investment advisers are bound by the SEC’s Investment Advisers Act, which requires them to act in a fiduciary capacity putting your interests ahead of theirs, and brokers are bound by FINRA rules, which require brokers to act in your best interest in making recommendations. If you suspect that your financial advisor did not properly keep your liquidity needs or best interest in mind, you should consult with a securities law expert, like the attorneys at Malecki Law in New York.
In a concerning turn of events, the Dow Jones Industrial Average declined over 2.5% on Monday, August 5, while the S&P 500 lost 3%, and the Nasdaq index lost 3.4%. This decline allegedly stems from volatile tech stocks, increased unemployment and interest rates.
However, more importantly, financial advisors should keep a close eye on not only financial markets, but current events and world news. There may very well be signs that point to market declines before they occur, and while customers never want to lose money, there are specific customers, like those approaching retirement or who are currently retired, that may have a completely different set of goals and time horizons. For example, retired customers may not want to invest in volatile stocks, or trade aggressively because they may not have time to wait out a recovery in the markets. The onus is on your financial advisor to ensure that your investment strategy is in-line with your best interest, including, but not limited to, your personal liquidity needs, time horizon, and risk tolerance. If your investment strategy does not match up with your needs, or if your financial advisor does not take a proactive approach, you may have a case and should meet with an investor protection attorney, like the lawyers at Malecki Law in New York.
Financial advisors are required to know their customer; their age, medical history, financial background, and best interest must always be considered while handling an account. Aptly named “Know Your Customer” (KYC), FINRA Rule 2090 instructs members to use due diligence in maintaining an account, and to know their customer’s specific, personal details. Financial advisors and member firms are obligated to review customer transactions, and ultimately ensure their customer’s portfolio is in-line with their investor profile and overall investment objectives.
In an effort to increase investor protection, the SEC introduced Regulation Best Interest (Reg BI), and by 2020, all financial advisors had to comply with the four pillars of Reg BI when making investment recommendations to retail investors. Reg BI replaced the existing “suitability” standard for financial advisors bound by FINRA rules (otherwise known as stockbrokers), where financial advisors were only obligated to suggest “suitable” investments for their customers. Although an investment may be “suitable,” it may not align with the customer’s best interest. Reg BI created a higher standard for financial advisors, who must make investment recommendations to their customers with the customers’ best interest at the forefront. This is especially important when dealing with a customer who is either approaching retirement, or already in retirement, as retirees do not have much time to make up for significant losses incurred by volatile or risky stocks as compared to younger investors with a longer time horizon.
Furthermore, financial advisors should actively ask questions about their customers’ short and long-term investment objectives. In an ever-changing financial market, with the looming possibility of a stock market crash, or a sharp decline, like the one we witnessed on August 5, 2024, the financial backdrop should always be assessed and considered in connection with your specific investor profile. If your financial advisor has misled you, or was negligent in following any of these guidelines, you should have a securities industry lawyer, like the attorneys at Malecki Law to review your case.
Contributions by Brandon Amato, Summer Legal Intern and Student at New York Law School.