What Happens if a Broker Provides Misleading or Omitted Information?
When a financial advisor sits down with a client ready to make a recommendation,
many times the advisor has sales or promotional literature to present
to the client that includes performance reports of whatever they’re
trying to sale. When discussing the recommendation, a broker will often
use performance data and projections to give the client an understanding
of how the product will perform in the future.
One of the main ways regulators try to protect investors is by prohibiting
brokers from misleading clients with untrue or false statements, or leaving
out material facts. There are specific things that brokers must disclose
to their clients when using this past performance data.
For instance, the performance data often does not reflect transaction costs,
fees, and the volatility of the investment, all things that are important
considerations when making a purchase. When a fancy chart shows that a
particular fund has made an average of 6% over the last 4 years, it may
not be that simple. It could have actually lost 5% the first year, made
22% the second year, made 9% the third year, and then lost 2% the fourth year.
So the average performance of 6% sounds great, but it doesn’t account
for the fund’s volatility. It also may not account for the 1% or
more per year you would be paying in fees for an actively managed mutual
fund. That 6% that you thought you would be getting is already inflated
if it doesn’t account for expenses and fees.
If your broker has in the course of selling you a security, suggested to
you to expect an investment to perform a certain way based on how it has
performed in the past, he or she may have violated industry rules, especially
if you were not given an understanding of how that performance data was
If you find yourself in that situation,
give our firm a call to discuss your potential legal options. I hope this has been helpful.