However, it is also an important aspect of financial planning. For those who are new to the world of investments, or if you don’t have the required knowledge base to make investments, then you might consider consulting an investment advisor.
While most investment advisors pride themselves on their diligent work and ethical code, some are negligent and may lose you money on your investments. Even though the UK has a regulatory framework in place to provide guidelines on the expected relationship between an advisor and their client. But what happens when this relationship turns sour, can you sue a bad investment advisor?
This article will explore the responsibilities of investment advisors, the different types of misconduct, legal grounds for lawsuits, how you link investment advisors to financial losses, any statute of limitations, class action lawsuits, potential defences against lawsuits, and litigation versus arbitration. As well as an analysis of notable lawsuits against investment advisors that have occurred recently, with a particular focus on the St James’s Place compensation issue.
Can You Sue A Bad Investment Advisor?
Responsibilities Of Investment Advisors
The primary purpose of an investment advisor is to guide and assist their clients in making sound financial decisions that will benefit them positively. To obtain this goal, advisors have the following set of responsibilities to their clients:
- To provide accurate and current information to their clients.
- To conduct broad and thorough research for their client's benefit.
- And to take the previously obtained information and create a tailored investment strategy (or strategies) that aligns with the client’s risk tolerance and end financial goals.
Additionally, investment advisors are expected to place their client’s interests above their own. They should also disclose any conflict of interest, and remain completely transparent with their client. A client should expect their advisor to act in good faith, whilst showing loyalty and care for the good of the client. This is also known as their fiduciary duty.
Types Of Misconduct By Investment Advisors
While most investment advisors carry out their fiduciary duties, some sadly don’t. In cases where this occurs, it generally means that the advisor has completed some form of misconduct. This could mean anything from misrepresentation or if they failed to disclose valuable information, to a conflict of interest or intentional investment fraud. The five main types of misconduct are displayed in the table below:
| Form of misconduct | Meaning |
| Misrepresentation | When your advisor has provided you with either false or misleading information regarding your investments. |
| Churning | This relates to either the buying or selling of securities with the sole purpose of generating commission for the advisor, rather than to fulfil your financial goals. |
| Unauthorised trading | When your advisor completes a trade without your permission. |
| Conflict of interest | This is when your advisor fails to disclose any conflict of interest which may lead to them acting without your best interests in mind. |
| Negligence | When your advisor does not complete proper research, fails to monitor your investments, or doesn’t provide suitable or accurate advice. |
Legal Grounds For Lawsuits
In cases where you have experienced a financial loss as a result of your investment advisor’s negligence or misconduct, you may have legal grounds to file a lawsuit. If you believe this has happened to you, the three most common legal grounds you may be able to file under include:
- Breach of fiduciary duty: As we have previously discussed, if your advisor has in any way broken their fiduciary duty you can seek compensation. This relates to an advisor failing to act in your best interests, not providing the necessary care, or failing to fulfil your agreement.
- Negligence: Similar to breaking their fiduciary duty, if your advisor has been negligent in their responsibilities regarding your investments or finances, and you suffer a loss as a result, you may have a case.
- Fraud and misrepresentation: In cases where your advisor has provided you with false or incorrect information, or omits any details that may influence your investment decisions, you could claim compensation.
The legal system aims to protect investment clients and ensure that any advisors in the industry are held accountable for their actions.
Linking Advisor’s Actions To Financial Losses
Like in any other legal case, you can link your investment advisor to any financial losses you believe have occurred as a result of their misconduct or negligence. If you are taking a legal case forward, you must expect to provide a raft of evidence to support your case. Types of evidence you may be able to provide include: testimonies from experts, financial records, communication logs between you and your advisor, information related to market conditions and your advisor’s corresponding advice, as well as evidence demonstrating the impact the loss has had on your investment portfolio. Your ability to provide this evidence is instrumental to establishing the connection between your advisor's actions and your financial losses.
Statute Of Limitations
The statute of limitation relates to a predetermined time limit which a lawsuit must be filed within. In the UK, there are a variety of statutes of limitations in place. Specifically regarding lawsuits involving financial businesses, you must make your complaint to the business/individual involved or the Financial Ombudsman within six years of the alleged misconduct or negligence occurring. If you inform the business first, rather than the Financial Ombudsman, then the time limit may be extended beyond the initial problem occurring. By being proactive and launching your case quickly, you will have a greater chance of success.
Class Action Lawsuits Against Advisors
A class action lawsuit is when multiple clients group together to pursue the same lawsuit if they have all suffered the same or similar loss. This type of lawsuit can be more practical and cost-effective, rather than going alone and can even strengthen your legal case.
However, for a class action lawsuit to go ahead, it needs to be certified by the court and meet specific criteria. Additionally, all clients must share common factors in each of their cases. Court action lawsuits are also less common in the UK.
Defences Against Lawsuits
While we are educating you on your rights to sue a bad investment advisor, it is also important that you are made aware of any defensive manoeuvres that they may try to make. The three most common types of defences your advisor may use are:
- Lack of causation: Simply put, your advisor would argue that their actions or advice was not the direct cause of your financial losses.
- Suitability of advice: If your advisor uses this defence, they are arguing that the advice they provided at the time was in line with your financial goals or your risk tolerance at the time of your financial loss.
- Statute of limitations: As we have previously mentioned, your advisor can use this defence if you have not pursued your lawsuit within the specified time limit.
Additionally, they may also argue that your financial losses were a result of market conditions at the time or that their actions were industry standard. The specific circumstances of your lawsuit, as well as any outside factors, will influence the outcome of your case. Your investment advisor will not roll over easily and admit any wrongdoing, so you must have strategies in place for any counterarguments they may make.
Arbitration vs Litigation
If you are considering launching a lawsuit against your investment advisor, you should first check any agreements you signed with them. There may be a clause that ensures you resolve any disputes through arbitration rather than litigation. But what does this mean?
- Arbitration is a private process involving an arbitrator (who is an impartial third party) who will review any evidence of misconduct or negligence and decide the outcome.
- Whereas litigation is when you take your case to court, with the judge and jury coming to the final ruling.
Typically, arbitration is quicker than litigation. However, you may not be able to appeal any decision that does not favour you. You are more likely to get the chance to appeal if you can go down the litigation route. But this avenue is also more time-consuming and requires more resources.
Recent Notable Lawsuits Against Investment Advisors
Another key step you must look into before pursuing your legal case is to educate yourself on recent lawsuits that may provide valuable insights. Notable lawsuits which involve well-established financial institutions prove how valuable regulatory scrutinising is.
One particularly notable case relates to the prominent UK wealth management firm, St James’s Place. In 2022, the firm was found to be disclosing practices related to costs and charges for its clients and faced legal action and censure as a result. After looking into the case, the Financial Conduct Authority (FCA) and St James’s Place came to an agreement where affected clients received compensation.
Can You Sue A Bad Investment Advisor? Summary
In short, yes, you can sue a bad investment advisor. However, your ability to launch a successful case relies upon a variety of factors, including:
- The nature of the misconduct or negligence that resulted in your financial loss.
- Your ability to provide evidence connecting your losses with your advisor's misconduct.
- And whether there are any statutes of limitations impacting your ability to launch a lawsuit.
The financial industry holds the accountability of its investment advisors in high-regard. So, if you have a case, be sure to seek out legal advice to ensure that it is as strong as possible.
