When hiring a broker, you expect that person to take care of your money and make wise decisions about where to place it. You know there is a risk, but by hiring a broker, you’re hoping that calculated risk is far less than if you were to make investment decisions on your own.
In a perfect world, the above scenario would always play out. Unfortunately, brokers can make decisions that are not only in your best interest but unethical. That’s where investors can have control by filing a potential claim.
Differences Between Negligence, Gross Negligence, and Misconduct
While all three are not situations you want to catch a broker in, there are significant differences between negligence, gross negligence, and misconduct.
Ordinary negligence is when someone makes a bad decision when they know what the correct decision should be. This happens commonly amongst everyone — for example, texting on a cell phone while driving a vehicle. Every driver knows this is dangerous, and in many states is against the law, but many drivers still choose to make this risky decision.
In investing, an example of negligence could be a failure to diversify a portfolio. This is when a broker purposely chooses not to invest in a broad range of businesses with a variety of investment types. Unless someone goes to a broker and tells them to specifically keep their money in all one type of investment, it is usually frowned upon not to have a wide array of investments in a portfolio.
Another example is the broker putting money in an investment that has a higher risk than what the investor feels comfortable with or is not on the same level of risk as to the investor’s current investments.
If a broker has a conflict of interest with one of the stocks they’re putting money into and the broker does not disclose this information to the investor, this would be a sign of negligence. An example of this is if the broker would have a personal financial gain if more of the company’s stocks were bought, so the broker puts some of their investor’s funds into that stock.
Other examples of negligence include if the broker did not sell a poor-performing stock in a timely manner or if the broker did not give enough notification to an investor about taking action to correct an issue.
All of these scenarios show that a broker may not be taking action to purposely cause the investor ill-will, but it does show that the broker may not be making the best decisions for the investor.
Gross negligence is when a broker knows the potential consequences of their actions and continues to make reckless decisions. An example of this would be a broker reading negative information about a company and knowing the company may discontinue, yet the broker still puts an investor’s funds into that company’s stock.
Broker misconduct differs from either type of negligence as this is when a broker purposefully and maliciously takes action on your behalf that is not in your best interest. Examples of broker misconduct include:
- Churning: when a broker purposely makes several trades so they personally earn a commission rather than looking out for their investor.
- Margin trading: when a broker purposely buys more stock than they have money allocated to trade.
- Broker theft: when a broker purposely steals money from their client and presents the loss to the client in a different way in hopes not to get caught.
What to Do If My Broker is Negligent
If you suspect your broker of any misconduct, including negligence, it’s best to talk to an attorney first. They can tell you whether or not there are real signs of negligence or even broker misconduct. For all your investment question needs, contact Weltz Law. Our team of attorneys is here for you with offices in New York, California, and Florida — reach out today to get started. (877) 905-7671