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Dear Quentin
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I have a $1.5 million account with one of the largest investment managers in the United States. In the fall of 2021, the stock market was depressed, and the Federal Reserve predicted that benchmark interest rates would rise significantly from zero in the coming months.
I contacted my account manager and asked what they were going to do about this news. I told him that I believed I needed to sell my investments in bonds and convert them into cash. I also suggested that the company liquidate some of its growth stocks and keep the proceeds in cash or invest in value stocks.
This counselor told me that the company doesn’t react to this kind of news for at least six months to make sure it’s a real trend. He also said he does not invest in bonds to make a profit. He said he only invests in bonds to reduce volatility.
He went on to say that the company does not believe the Fed will raise interest rates from zero to the then-expected 2.8% by the end of 2023. As an aside, they said they typically don’t invest in value stocks, only value stocks. growth stocks.
The company didn’t follow my advice, and within eight months the Fed raised the benchmark interest rate. The value of my bond portfolio has fallen by over $100,000 and my stock portfolio has fallen by $200,000. The company’s CEO admitted in the company newsletter that they had made a mistake.
I want to sue my counselor for negligence. What do you think?
dissatisfied investor
Dear dissatisfied,
The key words of the letter are “suggestions” and “advice.”
You’ve talked to your broker about what you want to do with your portfolio, but that’s not the same as giving them a sell order. Investing in stocks has an element of risk, and the S&P 500 SPX, Dow Jones Industrial Average DJIA, and Nasdaq Composite Index COMP all fell significantly in 2022. If you sue your financial advisor, the burden of proof is on you. It is not clear whether he refused the order.
According to the Texas-based Forman Law Firm, “Brokers and other financial professionals generally have a duty to follow your instructions regarding the entry and execution of orders. Failure to do so is a violation of industry rules and may even result in a breach of the broker’s fiduciary duty to you.”
fiduciary responsibility
Additionally, “While there is debate as to whether a securities broker is a fiduciary of the entire broker-investor relationship, depending on the facts and circumstances, most state laws require that from the time the broker invests with you “We have made it clear that we have a fiduciary duty.” To give or permit a command until it is carried out. If you suffer financial losses due to the broker’s failure to follow your instructions, you may be entitled to claim damages, fees and costs arising from those losses. ”
Bottom line: “If you place an order to buy or sell a particular investment with a broker, and the broker fails to submit the order in a timely manner or with the correct terms (price, number of shares, order type, market).” Your order, limit order, good until you cancel it — your broker has breached its obligation to you,” the law firm said.
The key word here again is “order.”
Typically, you only incur a loss if you sell the bond early. Your advisor was right on this point, but if you had invested your money in, say, the SPDR Long Term Treasury ETF SPTL and sold it late last year, you would have actually lost a significant portion of your principal. Dew. investment. The long-term government bond market reached its peak in August 2019. Since then, as Mark Hulbert recently reported, the SPTL ETF has lost 10.1% per year, and the Vanguard Long-Term Treasury Index ETF VGLT has lost 10.9% per year.
Not all asset managers are fiduciaries. That is, professionals who must act in the best interests of their clients under the Investment Advisers Act of 1940. Find out if your advisor is a fiduciary rather than a broker-dealer, for example, and if he is a fiduciary. Member of the Financial Industry Regulatory Authority. Certified Financial Planners have a similar code of ethics. You can report this to your broker’s manager. Most brokerage firms have a compliance officer.
“Counselor” and “Advisor”
MarketWatch columnist Phil Van Doorn also has some concerns about your interpretation of events, particularly your use of the term “counselor” rather than “investment advisor.” He assumes you are referring to an investment advisor who works for a brokerage firm.
Your advisor, the person you call your “counselor”, tells you that his company “will not respond to this kind of news for at least six months to confirm that it is a real trend.” I did. Van Dorn said this also does not seem to constitute a refusal at face value.
“He may be referring to a strategist or group of strategists at the firm who share opinions on asset allocation in general, but he does not specifically mention his own account. “if he was directing the transaction,” he says. . “The same goes for the investment advisor’s general comments about his firm’s expected rate of interest rate increases and the firm’s philosophy regarding growth and value stocks.”
“It appears you asked your investment advisor what his firm plans to do in response to expectations that the Federal Reserve will raise the federal funds rate,” he says. “A brokerage firm does not intend to do anything to an individual’s investment account in response to anticipated macroeconomic events unless the brokerage firm’s customers request that type of investment management service.”
You say your broker told you, “They don’t invest in bonds to make money.” Van Dorn suspects that you misunderstand him. “Typically, the purpose of fixed income investing is income,” he says. “Yes, when you buy a bond, the market price moves in the opposite direction of interest rates. But if you hold the bond to maturity, you receive your face value unless you default.”
It looks like your advisor’s company has already admitted to making the malicious calls. Even Warren Buffett has made mistakes. Most investment contracts include an arbitration clause to resolve disputes like the one you describe. The Financial Industry Regulatory Authority and the Securities Industry and Financial Markets Association, an industry group representing brokerages, banks and asset managers, say arbitration saves valuable time and money for all parties and reduces the amount of money from individual investors. It claims to help promote small-value claims.
It’s okay to make bad calls. It is not good to refuse an order. However, this seems more like a communication failure than an actual rejection by the broker.
If you have financial and ethical questions, you can email The Moneyist at qfottrell@marketwatch.com. You can also follow Quentin Fottrell on X, the platform formerly known as X. twitter.
Monetarists regret that they cannot answer questions individually.
Previous columns by Quentin Fottrell:
My husband and I divorced and bought separate homes. Now we are thinking of getting together again and consolidating our assets. Is it wise?
My property is worth millions of dollars. How can I keep my daughter’s husband out of it?
‘That was a mistake’: My father set up a revocable trust and left everything to my stepmother. She is completely cutting me off. what can i do?
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