Financial advisors sometimes give bad investment advice to promote their own self-interest. Focus on higher commissions and lack of investment knowledge can result in significant financial loss for investors.
Bad Investment Advice
Investment decisions sometimes have high risks with uncertain results, so most investors rely on their financial advisors for sound advice to minimize risks. There is no crystal ball when it comes to investment results, but investors expect their advisors to give advice based on professional knowledge and sound judgment. When bad investment advice is given, it is often due to the advisor putting his/her own self-interest ahead of the client’s, lack of investment knowledge, or lack of due diligence.
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Advisor Self-Interest
When an advisor puts his/her own self-interest above the client’s, it’s often driven by the desire to maximize fees and commissions. Promotion of self-interest often results in investment losses, conflict of interests, and different types of fraud seen by a securities fraud attorney.
- Churning – Churning is an unethical sales practice that involves excessive trading of a client’s account. It generates more capital gains than necessary, and commissions come directly out of the client’s pocket.
- Leverage – Using borrowed money to invest in stocks can double fees and commissions for advisors. The practice may seem safe, but if stocks drop, leverage can double investor’s’ losses.
- High-Cost Investments – Recommending high-cost investments with complicated structures to an unsophisticated investor can generate big commissions and fees for advisors through built-in fees.
The securities fraud attorneys at Meyer Wilson often see self-interested advisors who sell clients what what the broker wants to see them rather than what the client needs. Sales are often easier, faster, and more lucrative for advisors, but often not in the best interest of their clients.
Investment Knowledge
While most advisors have a thorough knowledge of investment opportunities, many advisors spend little time on investment research and analysis. The majority of their time is spent on marketing and administrative duties. Knowledge, understanding of financial markets, and competence levels vary greatly between advisors. Some investment products are difficult to understand, and even the best financial advisors can make mistakes without due diligence.
When managing mutual funds, retirement accounts, pension funds and endowments, choosing funds that will outperform the market is difficult, even for seasoned professional advisors. Selecting riskier investments with a greater upside, or putting all of a client’s money in one or two stocks can create a volatile portfolio that can turn down sharply and create significant losses for investors.
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