Financial Advisor Liability

Preferred stock is like a combination between a common stock and a bond. It is safer than a common stock because it is closer to the front of the line than common stock holders if the company liquidates. They usually pay a dividend rate, and it is often much better than what you can get on bonds or CDs. But they do carry a market risk, so the price will go up and down.

Some preferred stocks have fixed lifetimes. When you buy them, you know the expiration date and the price that they company will pay to buy them back. In that case, they will vary with the market, but if you hold them, they act more like bonds in that you will get paid the redemption value. Finally, some are set up as convertables. That is, after a period of time, you can redeem them for some combination of common stocks, bonds, and cash.

If this was a bigger firm, they will have a person called a "compliance officer". Talk with that person and let them know that your broker was engaging in risky behavior without your approval. The worst that can happen is that they deny it. Once you get past this step, then post back and tell us what happened.

-john-

I am very much in favor of punishment for unscrupulous advisors who squander people's investment money in order to get higher commissions for themselves. But there some things you should clear up first. Please be more specific about what type of "advisor" did these things. Was it someone in a brokerage? How was this advisor paid? Did he or she receive a commission for the products recommended to you? It would help your case if you could show that the risky products you mention were ones with hefty commissions for the so-called advisor.

The second thing that is not clear is the kind of "risk" you are talking about. Preferred stocks are generally less risky than common stocks. So if 60-70% of your holdings were in preferreds, where was the risk? Was the other 30-40% in extremely risky stocks, so risky that the entire account was in danger?

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I suspect that at the time he sold you the preferred they were highly rated. That they were all in finance and real estate was the bad advice. They should have been more diversified.

The yield (in dollars) will remain constant unless the issuer goes belly up.

Probably poor. I wouldn't front money for a lawyer for this type of lawsuit.

Even though you had an advisor you still have to take some responsibility for educating yourself on what you are buying.

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The advisor was with A.G. Edwards. In this account he was paid by commission but not unreasonably so-between 1 to 1 1/2%. So it wasn't that. Also, the rest of the investments were a combination of bonds and closed-end funds. Other than the preferreds, I don't think there were any overtly risky holdings. My question as to risk pertained strickly to the preferreds.

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You can get excellent financial products without paying anything like a

1 to 1 1/2% commission. Look into Vanguard and Fidelity. Think about index funds. As far as your suspicions about your advisor are concerned, you should look at whether or not the particular funds he recommended to you have larger commissions than alternative products that better meet your needs. But I still think the best approach of all is a "no-commission" approach.

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Preferreds will fluctuate with the market, and are subject to the market manias. Recently, preferreds are down at least in part dues to the Freddie and Fannie issues. It is never a good time to sell when the market is in fear or liquidation mode - you just lock-in your losses. Given two to three years most preferreds will recover their value.

Without a list of the specific issues, it is really not possible to evaluate the positions. Ask your advisor for specifics on the preferreds, and ask for the last ten years of earnings history on each company that you own the stock in - including the most recent quarters and consensus earnings estimates. Get this info in print.

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"Michael" wrote

What were the exact directions you gave the advisor? Did you tell the advisor you were investing for the long or short term? For immediate income or for principal growth?

Since even Warren Buffett was buying Bank of America before it plummetted due to writedowns (meaning the very best were duped), I doubt you have a case. More importantly, without more information I cannot judge whether this was a bad move or not. If you are invested for the long term, then it is too early to say how well the advisor did, assuming these preferreds were highly rated when the advisor bought them for you.

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Agreed, but I don't think it would have changed anything in this particular case.

For starters, I am convinced Michael needs professional financial assistance. Perhaps, with a little reading, he could manage his own investments in the future, but his lack of experience with the different investment classes speaks volumes. [Michael I mean no offense and you certainly shouldn't feel bad. I think your probably way ahead of the general public, just not quite up to self-investing YET].

Given that he needs a financial adviser, he can either go with a fee- based "no-commission" adviser or a sales based adviser. I would always go with the former but they are going to charge you 1%-1.5% also. So fee/commission reduction isn't really an issue bases on the OPs statements (it is even possible that he has a fee-based adviser).

The last concern is that IF he has a commission-based adviser, was the adviser looking out for Michael's interest or his own. In my experience, preferred stocks are not an area of investing in which an adviser has a conflict of interest. Typically, any stock or closed-end fund traded on an exchange has a "ticket charge" and "commission". Sometimes the ticket charge can be waived or absorbed by the adviser. The commission is set by the adviser or, more likely, their compliance department. Regardless, the commission is not dependent on which stock or CEF is purchased. In other words, an adviser doesn't make more money buying WMT than he does TGT. It is loaded funds, annuities, life insurance, and proprietary in-house funds (e.g. Ameriprise) that usually have the potential conflicts of interest that you mention.

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I think it's an uphill battle. The advisor might not have done a good enough job of explaining to the possible risks involved with your investments and deserves to be fired. Or, as very often is the case, he thought he did but somewhere there was a breakdown in communication between the two of you. Regardless, unless you have convinving evidence that he neglected to detail the risks, it is unlikely that a suit would be successful.

As for the investments themselves: Assuming they were highly rated at the time of purchase, to call them "risky" now is akin to playing "monday morning quarterback". You can't directly equate "loss" with "risk" in single instances. Even seemingly safe investments can suffer from unpredictably rare events or substantial and previously unknown information. Fannie and Freddy were once consider extremely safe (almost as much so as gov't bonds). From your reasoning a treasury bill would be "high risk" if something extremely odd occurred and they went belly up (that's a whole other story, I know).

Perhaps, we can best help by focusing on damage control instead of speculating and finger pointing. Have you sold the preferreds or is the loss still only on paper? Have any of them suspended their dividends? Have any of them gone belly-up and been declared worthless?

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Your attitude is commendable. Sometimes it's wise to look back, but it's always wise to look forward. The hard part is managing both, when necessary.

I think you are right to transfer your securities. Regardless of fault or even if there is no fault at all, you should definitely only work with professionals that are on the same wavelength as you.

Don's earlier advice now becomes very pertinent. I would ask your new advisor about entering into a fee-based arrangement. I am pretty sure Morgan Stanley has such a platform. Your new advisor will collect a fee based on your assets but you shouldn't be charged commissions for the securities he buys. That way you can be confident he is serving you (not himself). Hint, hint: sometimes the advisor has the authority to negotiable fees down to 0.80% or so.

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