I even have a $1.5 million account with one among the key investment managers in the US. In the autumn of 2021, the stock market was weakening and the Federal Reserve was projecting that its benchmark rate would increase significantly from zero in the next months.
I contacted my account manager and asked what they were going to do in response to this news. I told him that I believed they need to sell my investment in bonds and convert it to money. I also suggested that the corporate liquidate some growth stocks and either keep the proceeds in money or invest it in value stocks.
This counselor told me that the corporate doesn’t react to this sort of news for at the least six months to make sure that it’s an actual trend. He also stated that they don’t put money into bonds to generate profits. He said they only put money into bonds to scale back volatility.
He followed this up by saying that the corporate didn’t think the Fed would raise the speed from zero to the then-projected 2.8% by the top of 2023. As an aside, they said, they often don’t put money into value stocks, only growth stocks.
The corporate didn’t follow my advice and inside eight months, the Fed had raised its benchmark rate. My portfolio of bonds dropped in value by over $100,000 and my stock portfolio fell by $200,000. The CEO of the corporate admitted in an organization newsletter that that they had made a mistake.
I need to sue my counselor for negligence. What do you’re thinking that?
Disgruntled Investor
“The corporate didn’t follow my advice and inside eight months, the Fed had raised the Fed rate and my portfolio of bonds had dropped by over $100,000 in value.”
MarketWatch illustration
Dear Disgruntled,
The important thing words in your letter are “suggest” and “advice.”
You had a conversation along with your broker about what you prefer to to occur along with your portfolio, but that’s different from giving them an order to sell. Any investment in a stock has a component of risk, and the S&P 500
SPX,
Dow Jones Industrial Average
DJIA
and Nasdaq Composite Index
COMP,
-2.06%
all declined significantly during 2022. The burden of proof would lie with you when you were to sue your financial adviser. It shouldn’t be clear that he refused an order.
In line with the Texas-based Forman Law Firm: “Generally, brokers and other financial professionals have an obligation to follow your instructions regarding the entry and execution of orders. A failure to follow your instructions, each as directed and in a timely manner, is a violation of industry rules, and should even end in a breach of the broker’s fiduciary duty to you.”
Fiduciary duty
It continues: “While there may be some debate about whether a stockbroker is a fiduciary for your complete broker/investor relationship, depending on the facts and circumstances, the law in most states is evident that a broker owes you a fiduciary duty from the time you give or authorize an order until the execution of that order. When you incur financial harm attributable to your broker’s failure to follow your instructions, you’re entitled to hunt damages, fees, and costs stemming from those losses.”
Bottom line: “When you give your broker an order to purchase or sell a selected investment, and the broker fails to timely submit that order or fails to submit the order with the proper terms — price, variety of shares, variety of order, market order, limit order, good til canceled — the broker violated his or her duty to you,” the law firm says.
Again, the important thing word here is “order.”
You generally only lose money on bonds when you sell them early. In that regard, your adviser was correct, but when you had invested money in, say, an SPDR Long-Term Treasury ETF
SPTL,
and sold it at the top of last yr, you’d have the truth is lost a substantial chunk of your original investment. The long-term Treasury market peaked in August 2019. Since then, as Mark Hulbert recently reported, the SPTL ETF has produced a ten.1% annualized loss and Vanguard Long-Term Treasury Index ETF
VGLT
had a ten.9% annualized loss.
Not all money managers are fiduciaries — that’s, professionals who must act of their client’s best interest under the Investment Advisers Act of 1940. Discover whether your adviser is a fiduciary — slightly than, say, a broker-dealer — and whether he’s a member of the Financial Industry Regulatory Authority. Certified financial planners have similar codes of ethics. You can report this to your broker’s manager. Most brokerages have a compliance officer.
‘Counselor’ versus ‘adviser’
MarketWatch columnist Phil van Doorn also has some concerns about your interpretation of events, particularly your use of the term “counselor” slightly than “investment adviser.” He assumes you mean an investment adviser working for a brokerage firm. Your adviser — who you consult with as a “counselor” — told you that his firm “doesn’t react to this sort of news for at the least six months to make sure that it’s an actual trend.” Van Doorn says this too doesn’t appear, at face value, to constitute a refusal.
“He can have been referring to a strategist or group of strategists working for the firm who share opinions about asset allocation on the whole, but not about your account particularly, especially when you had given your adviser an order to trade securities,” he says. “The identical applies to the investment adviser’s general comments about how high his firm expected rates of interest to rise, or the firm’s philosophy on growth or value stocks.”
“You appear to have asked your investment adviser what his firm was going to do in response to the expectation that the Federal Reserve would increase the federal-funds rate,” he says. “A brokerage firm isn’t going to do anything with a person’s investment account in response to an expected macroeconomic event unless the brokerage client has requested that variety of investment-management service.”
You say your broker told you that “they don’t put money into bonds to generate profits.” Van Doorn suspects you could have misunderstood him. “Normally, the target of a bond investment is income,” he says. “Yes, a bond’s market value will move in the other way of rates of interest after you purchase it. But when you hold the bond until maturity, you’ll receive its face value, barring a default.” (It’s not clear out of your letter, but when you ceded control of your financial decisions to an adviser and signed as much as a specific investment strategy, that will further weaken your hand.)
It appears that evidently your adviser’s firm has already acknowledged they made some bad calls. Even Warren Buffett has made mistakes. Most investment contracts include an arbitration clause for resolving disputes reminiscent of 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, argue that arbitration saves all parties useful money and time and helps facilitate smaller claims from retail investors.
It’s OK to make a nasty call. It’s not OK to refuse to place in an order. This, nevertheless, feels like a failure of communication slightly than an actual refusal by your broker.
You may email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly often called Twitter.
The Moneyist regrets he cannot reply to questions individually.
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