7 Signs Your Investment Losses May Be Fraudulent

When you invest through a broker or advisor, you are told to expect the value of your portfolio to fluctuate. You will experience losses due to market forces—and it is just part of the process. Ultimately, however, with a sound investment strategy, your portfolio should increase in value over time.

But what if it doesn’t?

While some investment losses are due to market forces, others are not. Unfortunately, broker and advisor fraud is a very real concern. Many investors suffer fraudulent losses—and, when this happens, investors may be forced to pursue compensation through the FINRA arbitration process.

When can (and should) investors pursue FINRA arbitration to recover their investment losses? Here are seven signs your investment losses may be fraudulent:

1. Your Losses Do Not Align with Market Trends

One sign that your investment losses may be fraudulent is that they do not align with market trends. If the value of your portfolio has plummeted while the market has stayed steady or improved, this is a potential red flag.

Of course, individual investments don’t necessarily follow the market, and different investment strategies can have different outcomes. But, if you are unclear on why you are suffering losses while other investors are reaping gains, it will be worth looking into the situation.

2. There is a High Volume of Trades in Your Portfolio

Another potential red flag is a high volume of activity in your portfolio. This could be indicative of churning—a fraudulent practice that unscrupulous brokers and advisors use to generate fees and commissions at their clients’ expense. If your broker or advisor is executing a high volume of trades without generating positive returns for your portfolio, this is worth looking into as well.

3. Your Fees Are Diminishing Your Returns

Even if your broker or advisor isn’t churning your account, paying fees that outpace your investment returns could also be a sign of fraud. Charging excessive fees is prohibited, and when brokers and advisors do so, they can—and should—be held accountable. An experienced investment loss attorney will be able to determine if your broker’s or advisor’s fees are higher than they should be.

4. Your Portfolio is Overconcentrated

We all know that diversification is important. Maintaining a diversified portfolio is one of the most fundamental tenets of a sound investment strategy. As a result, if your portfolio is not diversified, this could also provide grounds for you to seek to recover your investment losses from your brokerage or advisory firm in FINRA arbitration.

The opposite of diversification is overconcentration. Investment advisors have a legal duty to effectively manage their clients’ portfolios; and, under the SEC’s Regulation Best Interest (Reg BI), brokers now have a similar duty as well. So, if your portfolio was overconcentrated due to no fault of your own—and if you suffered investment losses as a result—you could have a claim for investment fraud.

5. You Don’t Recognize or Understand Your Investments

While there are many complex and sophisticated investment vehicles, most are not suitable for individual investors. In the vast majority of cases, brokers and advisors should be investing their clients’ funds in standard securities and bonds.

This means that if you don’t recognize or understand your investments, this could potentially serve as grounds to file a fraud claim as well. Far too often, brokers and advisors recommend high-risk investment vehicles not because these are sound investment options for their clients, but because they offer significant fees or commissions.

6. You Have Received Incomplete or Inaccurate Disclosures

As an investor, you are entitled to receive the information you need to make informed investment decisions. If you did not receive the information you needed to make informed investment decisions, this could also serve as grounds to pursue FINRA arbitration if you unknowingly make uninformed decisions that led to investment losses.

This is true whether your broker or advisor inadvertently omitted material information or intentionally led you into a high-risk investment. If your broker or advisor is responsible for your investment losses, you can—and should—fight to hold your broker or advisor accountable.

7. You Can’t Get in Touch with Your Broker or Advisor

Finally, if you have suffered unexplained investment losses and you can’t get in touch with your broker or advisor, this could be the biggest red flag of all. If you have inquired about losses in your portfolio and your broker or advisor isn’t responding to your text messages or calls, this is not the time to give your broker or advisor the benefit of the doubt.

What if You Have Suffered Fraudulent Investment Losses?

If you have suffered fraudulent investment losses, what should you do? In this scenario, protecting your legal rights needs to be your top priority. This means that you should promptly consult with an attorney about pursuing FINRA arbitration.

FINRA arbitration is a process designed to allow defrauded investors to seek accountability when necessary. Registered brokers and advisors are required to submit to arbitration to resolve investor disputes, and arbitration provides a venue for investors to present claims of fraud. If a FINRA arbitrator rules in an investor’s favor, the investor can recover not only the investor’s direct losses, but potentially “well-managed portfolio losses” as well.

While investors are not required to hire an attorney to represent them in FINRA arbitration, the process is complicated, so experienced legal representation is strongly recommended. It is also worth considering that your broker or advisor will most likely be represented by the firm’s defense counsel; and, if you have suffered significant fraudulent losses, the outcome of your arbitration case could have a major impact on your wealth or retirement savings. Investors can typically hire an attorney to represent them in FINRA arbitration at no out-of-pocket cost—with their legal fees (if any) being deducted from their settlement or arbitration award if their case is successful.