The current volatility in the equity markets has led to a number of enquiries from people dissatisfied with the services provided by their investment advisors. In particular, I have been asked a number of times about the possible liability of investment advisors for investor losses.

This issue is not new. It seems to arise every time the stock markets take a dip, especially if the dip is prolonged.

Obviously, every case is different but there are some general principles that can be gleaned from the jurisprudence.

The cases differentiate between the type of broker who simply makes purchases and sales on the instructions of clients, and the type of broker who appears to be offering guidance and advice on which an investor can rely.

A broker who acts basically as an order taker probably does not have any responsibility for the wisdom of the transactions involved.

A broker who acts basically as an order taker probably does not have any responsibility for the wisdom of the transactions involved. If that broker is asked to give an opinion and does so but makes it clear to the client that the opinion is merely a personal opinion and is not the result of extensive research by the broker or his brokerage, it is going to be difficult to pin liability on the broker.

However, these days, most brokers try to develop business by offering guidance using phrases like “growing and managing retirement wealth” or “keeping investments safe”. Sometimes brokers characterize themselves as financial advisors with extensive investment experience.

The cases are clear that such brokers have to expect that their advice is going to be relied upon, and will have to accept responsibilities well beyond that of the order taker. They take on a duty to provide competent professional advice upon which clients, especially experienced ones, can rely completely.

In those circumstances, a broker or any financial advisor will be treated like any other professional advisor, including doctors, accountants and lawyers. The broker will be expected to take reasonable steps to ensure that investors are aware of the available options and of the potential benefits and risks associated with each one.

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