I have a $1.5 million account with one of the top investment managers in the US. In the fall of 2021, the stock market was weakening and the Fed was expecting its benchmark interest rate to rise significantly from zero in the following months.
I contacted my account manager and asked what they would do in response to this news. I told him I thought they should sell my bond investment and turn it into cash. It also suggested that the company divest some growth stocks and keep the proceeds in cash or invest them in value stocks.
This consultant told me that the company does not react to this type of news for at least six months to make sure it is a real trend. He also stated that they do not invest in bonds to make money. He said they only invest in bonds to reduce volatility.
He followed that up by saying the firm doesn't 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 don't generally invest in value stocks, only growth stocks.
The company did not follow my advice, and within eight months, the Federal Reserve raised its benchmark interest rate. The value of my bond portfolio decreased by more than $100,000 and my stock portfolio decreased by $200,000. The company's CEO admitted in a company newsletter that they had made a mistake.
I want to sue my advisor for negligence. what do you think?
Disgruntled investor
“The company did not follow my advice and within eight months, the Fed raised interest rates and the value of my bond portfolio fell by more than $100,000.”
Market watch illustration
Dear indignant,
The keywords in your message are “suggestion” and “advice”.
You've had a conversation with your broker about what you want to happen to your portfolio, but this is different from giving them a sell order. Any investment in stocks involves an element of risk, and the S&P 500 SPX,
Dow Jones Industrial Average (DJIA) and Nasdaq Composite Index,
They all declined significantly during 2022. The burden of proof will be on you if you are going to sue your financial advisor. It is not clear that he refused.
According to the Texas-based law firm Foreman: “In general, brokers and other financial professionals have a duty to follow your instructions regarding entering and executing orders. Failure to follow your instructions, as directed and in a timely manner, is a violation of industry rules, and may even result in a breach of the duty The credit intermediary towards you.
Fiduciary duty
It continues: “While there is some debate about whether a stock broker is a fiduciary for the entire broker-investor relationship, depending on the facts and circumstances, the law in most states is clear that the broker owes you a fiduciary duty from the time you give an order or authorized until that order is executed.If you suffer financial harm due to your broker's failure to follow your instructions, you have the right to claim damages, fees and costs resulting from those losses.
Bottom line: “If you give your broker an order to buy or sell a specific investment, and the broker fails to place that order in a timely manner or fails to place the order on the correct terms – price, number of shares, order type, market,” the law firm says: “Limit order,” the law firm says. Good until canceled – the broker has breached his duty to you.”
Again, the key word here is “system.”
Generally, you won't lose money on bonds unless you sell them early. In this regard, your advisor was right, but if you had invested the money, for example, in the SPTL Long-Term Treasury ETF,
And if you sold it at the end of last year, you would have actually lost a significant portion of your original investment. The long-term Treasury market peaked in August 2019. Since then, as Mark Hulbert recently reported, the SPTL ETF has had a 10.1% annual loss, and the Vanguard Long-Term Treasure Index ETF VGLT has had a 10.9% annual loss.
Not all money managers are fiduciaries — that is, professionals who are required to act in their clients' best interests under the Investment Advisers Act of 1940. Find out if your advisor is a fiduciary — not, say, a broker-dealer — and whether they are. Member of the Financial Industry Regulatory Authority. Certified financial planners have a similar code of ethics. You can report this to your broker manager. Most brokerage firms have a compliance officer.
“Adviser” vs. “Adviser”
MarketWatch columnist Phil Van Doorn also has some concerns about your interpretation of events, particularly your use of the term “adviser” rather than “investment advisor.” It assumes you mean an investment advisor who works for a brokerage firm. Your advisor — whom you refer to as “the advisor” — tells you that his company “does not react to this type of news for at least six months to make sure it is a real trend.” On the face of it, this also does not appear to be a rejection, Van Doorn says.
“He may be referring to a strategist or group of strategists working at the firm who share opinions about asset allocation in general, but not about your account in particular, especially if you've given your advisor an order to trade securities,” he says. . “The same applies to an investment advisor's public comments about how much his company expects interest rates to rise, or the company's philosophy on growth or stock value.”
“It sounds like you asked your investment advisor what his company would do in response to expectations that the Federal Reserve will increase the federal funds rate,” he says. “A brokerage firm will not do anything with an individual's investment account in response to an expected macroeconomic event unless the brokerage client requests this 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 may have misunderstood him. “In general, the goal of investing in bonds is income,” he says. “Yes, the market value of a bond will move in the opposite direction to interest rates after you buy it. But if you hold the bond to maturity, you will get its face value, barring default. (It's not clear from your letter, but if you give up control of your financial decisions For an advisor and subscribe to a particular investment strategy, this would further weaken your hand).
It sounds like your advisor's company has already admitted that it made some bad decisions. Even Warren Buffett 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, a trade group representing securities firms, banks and asset managers, say arbitration saves all parties valuable time and money and helps facilitate small claims from retail investors.
It's okay to make a bad call. It is not acceptable to refuse to submit an application. However, this appears to be a failure of communication rather than an actual rejection by your broker.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.
The Moneyist regrets that he cannot respond to questions individually.
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