Madoff Scandal Leads To Advisors Also Being Victimized!

By William Finch on January 11, 2010, 8:06 am Posted in Business News

When the Madoff scandal details became known, it set off another variety of lawsuits. Have you seen the ads, encouraging investors to recoup lost investments by suing their financial adviser and broker/dealer?

Due Diligence In Investment Agreements

Normally, this wouldn’t succeed. When you sign an investment agreement, you acknowledge that there is risk. The broker/dealer is required to do “due diligence” on the investment before it can be offered to you, and your adviser is required to do a risk assessment for you. The majority of advisers and their broker/dealers work hard to meet all FINRA requirements.

Risk Assessment

However, lawyers are persuading clients to sue on the basis of suitability, claiming that the adviser put the client in a riskier investment than they were suited for. This puts the burden of proof onto the adviser and B/D, they have to show evidence that the investment was legitimate, and suitable for the client.

Many clients have a relationship with their adviser, and are reluctant to sue, but are told that the B/D’s Errors & Omissions insurance will pay. What the client may not realize is that all complaints are required to be reported to FINRA, which puts their adviser/broker/dealer under intense scrutiny. The complaint shows on the adviser’s record, damaging his/her reputation. E&O insurance can have a very high deductible, the adviser could personally be held liable for legal fees up to $50,000 or more!

 

Suits Don’t Usually Go To Court

Such suits do not go to court. There is usually an arbitration clause in investment paperwork. If the client wins, they may recoup cents on the dollar, which the lawyers get a percentage of. If the client loses, they have not only lost their investment, but incurred legal fees, and the advisor’s reputation is still damaged. Investors should know their complaint is legitimate before starting this process!

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