Common Investment Advice Malpractice Pitfalls To Look Out For

• Using a financial advisor comes with its own set of risks
• The number of claims relating to malpractice is on the rise
• These are the common pitfalls to look out for

Using the services of a legitimate investment advisor is often seen as a way of avoiding the risk of falling foul of fraudsters, but it comes with its own set of problems. More and more investors are finding out that if the advice given by an agent constitutes malpractice, then there could be a chance to reclaim losses.

We’ve created a list of the most common malpractice risks to look out for. Unfortunately, it’s not just Ponzi schemes and social media scams that investors need to be wary of.

Common Investment Advice Malpractice Pitfalls To Look Out For

A common way an advisor might breach the duty of care protocols is if they do not consider a client’s specific needs and personal situation when constructing an investment plan. Liquidity of assets needs to be factored in, especially during an economic downturn when there is an increased risk of an investor becoming unemployed.

Portfolio diversification is also on a good advisor’s ‘to-do’ list. The rollercoaster ride the financial markets experienced between 2020 and 2022 highlights how spreading risk can smooth out returns and protect wealth. It’s one of the basic rules of successful investing.

Investing using margin scales up risk-return and isn’t something most long-term investors commit to doing. The ability to borrow money to take larger positions is great when trading decisions go your way, but it can blow up accounts when they go wrong. Any advisor that commits a client’s account to trade on margin will need justification that it was in the best interests of an investor who was also fully aware of the risks.

Reinvestment decisions also need to be closely monitored. If an advisor allocates capital to a particular asset without justification, they might receive commissions in return, but it might not be in the client’s best interests.

The above red flags relate to decisions made by advisors, but there can also be a malpractice case relating to necessary action not being taken. Depending on the nature of the agreement, an advisor can be liable if they don’t move money to protect wealth.

Final Thoughts

The advice offered by agents should fall in line with the market protocols. If it doesn’t and leads to losses, as many investors are discovering, there can be grounds for making a compensation claim. If third-party advice is something an investor wants to avoid altogether, then that can also cut back on fees and commissions. But self-traders should mitigate fraud risk by ensuring they choose a regulated broker.

Crowdsourcing information about scam brokers can help others avoid falling into the traps set by disreputable brokers, and you can share your experiences here. If you would like to know more about this particular topic or have been scammed by a fraudulent broker, you can also contact us at [email protected]

About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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