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 weakening, and the Federal Reserve expected its benchmark 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 them I thought they should sell my bond investment and convert it to cash. I also suggested the company liquidate 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 ensure that it is a real trend. He also stated that they don’t invest in bonds to make money. He said they only invest in bonds to reduce volatility.
He then said the company didn’t think the Fed would raise the rate from zero to the then-expected 2.8% by the end of 2023. Incidentally, they said, they generally don’t invest in value stocks, only growth stocks.
The company didn’t take my advice, and within eight months the Fed raised its key rate. My bond portfolio dropped in value by over $100,000 and my stock portfolio dropped by $200,000. The company’s CEO admitted in a company newsletter that he had made a mistake.
I want to sue my consultant for negligence. What do you think?
Dissatisfied investor
“The company did not take my advice and within eight months the Fed raised the Fed rate and my bond portfolio dropped by over $100,000 in value.”
MarketWatch illustration
Dear Discontent,
The key words in your letter are “suggestion” and “advice”.
You’ve had a conversation with your broker about what you’d like to happen with your portfolio, but that’s different than giving them a sell order. Any investment in a stock involves an element of risk and the S&P 500 SPX,
Dow Jones Industrial Average DJIA and Nasdaq Composite Index COMP,
all declined significantly during 2022. The burden of proof would be on you if you were to sue your financial advisor. It is unclear whether he refused an order.
According to the Texas-based law firm Forman: “Generally, brokers and other financial professionals have a duty to follow instructions regarding placing and executing orders. Failure to follow your instructions, either as directed or in a timely manner, constitutes a violation of industry rules and may even result in a breach of the broker’s fiduciary duty to you.
Fiduciary duty
He continues: “While there is debate as to whether a stockbroker is a fiduciary for the entire broker/investor relationship, depending on the facts and circumstances, the law in most states is clear that a broker has a fiduciary duty from the time of giving or authorizing an order until the execution of that order. If you suffer financial harm due to your broker’s failure to comply with your instructions, you have the right to claim damages, fees and costs arising from such losses.
Bottom line: “If you give your broker an order to buy or sell a specific investment and the broker fails to timely send that order or fails to send the order with the correct terms: price, number of shares, type of order, market order, limit order, valid until cancelled: the broker has breached its duty to you,” the law firm says.
Once again, the key word here is “order”.
You generally only lose money on bonds if you sell them early. In this regard, your advisor was right, but if you had invested money in, say, a SPDR Long-Term Treasury Bond ETF SPTL,
and you had sold it at the end of last year, you would have effectively lost a considerable 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 produced an annualized loss of 10.1% and the Vanguard Long-Term Treasury Index ETF VGLT had an annualized loss of 10.9%.
Not all money managers are fiduciaries, which are professionals who are required to 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, for example, a broker-dealer, and whether is a member of the Financial Sector Regulatory Authority. Certified financial planners have similar codes of ethics. You may want to report this to your broker’s manager. Most intermediaries have a compliance officer.
“Consultant” versus “consultant”
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.” He assumes you mean an investment advisor who works for a brokerage firm. Your consultant – who you call “consultant” – told you that his company “does not react to this type of news for at least six months to ensure that it is a real trend”. Van Doorn argues that this also does not appear, at first glance, to constitute a refusal.
“He may have been referring to a strategist or a group of strategists working for the firm who share views on asset allocation in general, but not on your account in particular, especially if you have given your advisor an order to trade securities,” He says . “The same goes for the investment advisor’s general comments about his firm’s expected increase in interest rates, or the firm’s philosophy on growth or value stocks.”
“It sounds like you asked your investment advisor what his firm would do in response to the expectation that the Federal Reserve would raise 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 has requested that type of investment management service.”
You say your broker told you they “don’t invest in bonds to make money.” Van Doorn suspects you may have misunderstood him. “In general, the goal of a bond investment is income,” he says. “Yes, the market value of a bond will move in the opposite direction of interest rates after purchase. But if you hold the bond to maturity, you will receive its face value, barring default.” (It’s not clear from your letter, but if you handed over control of your financial decisions to an advisor and signed up for a particular investment strategy, that would further weaken your hand.)
It sounds like your advisor’s company has already admitted they made some bad choices. Even Warren Buffett has made mistakes. Most investment contracts include a dispute resolution arbitration clause 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, argue that arbitration saves valuable time and money for all parties and helps facilitate smaller claims by retail investors.
It’s okay to make a bad call. It is not okay to refuse to place an order. This, however, seems like a miscommunication rather than an actual rejection on the part of 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 it cannot answer questions individually.
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