Let a Mutual Fund Fraud Lawyer Investigate Your Claim
Investors often place their savings into mutual funds to help reach their retirement and other financial goals. Mutual funds are managed by asset management or investment management companies. These companies collect money from thousands of small investors and invest pools of money in a variety of stocks, bonds and other securities. Mutual funds can offer certain advantages, such as professional management and diversification. However, as with any other investment, mutual funds are subject to the risks of market volatility and financial losses.
What is a Mutual Fund?
While many investors have mutual funds in their portfolios, few have a clear understanding of what mutual funds are or how they operate. A mutual fund is a type of investment in which multiple investors pool their funds for purposes of investing in a diverse selection of securities. But, investors do not do any of this directly. Instead, investors simply contribute their principal to the fund, and then the fund’s managers do the pooling and investing.
In theory, investing in mutual funds makes sense for a few reasons. First, by pooling their funds, investors can cut down on fees and transaction costs. Second, having a professional manage investors’ funds improves their likelihood of profitability. Third, diversification mitigates against the risk of investors facing sizable losses in the event of an unexpected swing in the market. However, our mutual fund fraud attorneys know it isn’t always the perfect investment. Mutual fund investors still can – and do – lose money, and in some cases their losses are attributable to fraud.
Types of Mutual Fund Fraud
Similar to other types of securities fraud, mutual fund fraud can take many different forms. Some of the more-common examples of mutual fund fraud include:
Failure to Disclose Mutual Fund Share Classes
Just like corporations, mutual funds typically issue multiple classes of shares. Each class of a mutual fund’s shares has its own unique set of rights and fees. For example, Class A shares in a mutual fund typically require payment of a front-end sales charge, while Class B shares typically require payment of annual administrative fees and a deferred commission that is calculated based on the fund’s performance. If a broker sold you shares without giving you the option to choose between classes, you could have a claim for mutual fund fraud.
Failure to Assess Suitability
Since investing in a mutual fund’s Class B shares is typically more expensive, prior to recommending a Class B investment, a broker must ensure that the recommendation is suitable for the investor. Failure to assess suitability, or recommending an investment in Class B shares despite knowing that it is not a suitable investment, is another form of mutual fund fraud.
Mutual Fund “Switching”
Since mutual funds are generally intended to be held as long-term investments, it should raise red flags if a broker is regularly trading shares in mutual funds similar to how the broker trades shares in corporate stocks. This is referred to as mutual fund “switching,” and it is typically done for the purpose of generating commissions for the broker. These commissions usually come at the investor’s expense, since the investor does not hold onto his or her shares long enough to earn returns that exceed the commissions and fees charged.
Excessive Mutual Fund Trading
Mutual fund investors need to be aware of potential broker misconduct and mutual fund fraud. Mutual funds are generally meant to be held for an extended period of time. If a broker is engaging in frequent trading of your funds, this activity should raise a “red flag.” For example, when a broker recommends that you switch from an existing mutual fund with one company to a new fund with a different company, you will be required to pay “switch fees.” Your mutual fund attorney warns that when a broker advises you to switch your funds to new companies within a short period of time, generating fees for him- or herself rather than benefitting your investment portfolio, the broker may be liable for mutual fund fraud.
Mutual funds generally offer volume discounts on commissions to customers making large purchases. “Break point” refers to the level at which the commission percentage drops and the discount becomes effective. The more money a customer invests in a fund, the larger the discount. When a break point exists, brokerage firms are required to disclose this information to the investor. If a broker recommends a purchase that is “just below” the break point, the recommendation is unethical and is considered a violation of FINRA rules. Brokers engaging in this behavior are subject to mutual fund fraud claims and can be held liable for the financial losses of their customers.
Other Misrepresentations and Omissions Leading to Mutual Fund Fraud
From misrepresenting the commissions or fees associated with a mutual fund to omitting information about bonuses or other incentives a mutual fund offers to brokers, investment fraud involving mutual funds can take various other forms as well. Investors who have suffered significant unexplained losses investing in a mutual fund should consult with a mutual fund attorney to find out if they have a claim for fraud.
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Contact a Mutual Fund Fraud Lawyer at Zamansky, LLC Today
The mutual fund fraud attorneys at Zamansky LLC are committed to representing investors who have been subject to broker misconduct and mutual fund fraud. Each stock broker fraud lawyer at our firm has the legal experience and knowledge of the financial industry to help you successfully pursue your case and recover your financial losses. Our securities arbitration law firm is dedicated to providing you with prompt and personalized attention throughout all stages of the process.
To learn more about your legal rights and options, contact a mutual fund fraud lawyer at Zamansky LLC. We offer a free, no-obligation initial consultation and respond to all inquiries within 24 hours. Call our offices today at 212-742-1414 or complete our online contact form.