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 calculated.

If you find yourself in that situation, give our firm a call to discuss your potential legal options. I hope this has been helpful.