Holding Brokers and Advisors Accountable for Inappropriate Junk Bond Recommendations
Except in cases of securities fraud, investments are not inherently unsuitable or suitable. Whether an investment is considered suitable depends on the individual investor’s situation. Brokers and financial advisors have the duty to review their clients’ risk tolerance to determine suitability before making investment recommendations.
Zamansky LLC holds brokers and financial advisors accountable for making unsuitable investment recommendations to their clients. Our New York City law firm helps clients across the country recover losses resulting from inappropriate investment advice.
Factors in Determining Investment Suitability
The term “junk bond” has the connotation of innate inappropriateness. However, junk bonds may be a good investment for certain investors. For example, a corporate client with high-value assets that can absorb potential losses may be willing to take a risk on these high-yield products. Conversely, a conservative elderly investor on the verge of retirement could be placed in financial jeopardy should the junk bond lose money or result in default.
When determining suitability, the broker or financial advisor should consider such factors as:
- Type of investor, such as a highly-liquid corporation or a high-asset individual versus a company with cash-flow problems, a couple starting a family or a retiree on a fixed income
- Current financial situation, including income, assets, liabilities, current portfolio and liquidity
- Existing portfolio, particularly the percentage of funds already invested in high-risk junk bonds
- Investment goals, such as high return in a quick time period or a safe, steady nest egg
- Risk tolerance, for example, can the investor afford to lose substantial money on a devalued or defaulted junk bond and can he/she recover from that loss
In some cases, suitability hinges on how much of the investment should be focused on non-investment grade junk bonds. Putting an entire portfolio into junk bonds would likely be unsuitable for any investor, and for some investors, no percentage of junk bond investment may be appropriate.
An investor may be in a position to take a chance on a substantial percentage of high-yield, high-risk junk bonds. The investor may be focused on high returns despite the high risk of loss. The broker and financial advisor have a duty to determine what percentage of an investors’ portfolio should be invested in high-yield bonds, depending on the investor’s risk tolerance and other factors outlined above. Brokers and financial advisors also have a duty to thoroughly research the investment and advise clients about the risks associated with the opportunities for higher, faster returns.
If you suffered losses in junk bonds, a high-yield bond lawyer at our firm will review the steps the broker or financial advisor took to determine suitability and whether negligence led to inappropriate advice.
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