What Kinds of Cases Against Investment Professionals are Most Common?

A. Churning.
“Churning” or excessive trading recommended or done by a broker violates the law. Most securities should be bought and held. Bonds, in particular, are bought and held for the income that they pay. Usually they are held until the bond matures. However, with the bull market, I am seeing many people, particularly elderly people, whose accounts have been very actively traded by their broker. Why is this? It’s because the fees are charged for each purchase and sale of a security, so the more trades, the more money the broker and the firm makes.

In a bull market, brokers can “hide” churning from clients who don’t closely follow the trading, because the account value is increasing. The client who only looks to see whether or not the account has made money, may not be aware of how much money has been lost to commissions when there has been active trading. The law provides that someone whose account has been “churned” can recover the amount of commissions, attorneys’ fees and costs, as well as the difference between the portfolio’s value and the value it would have had if the churning had not occurred.

B. Negligent Advice and Recommendations.
Advisors must give advice that is suitable and that is well researched. For example, before recommending any security, an advisor must have conducted reasonable “due diligence” to ascertain that it is a legitimate security and that it is suitable for the investor.

Selling a speculative investment to someone who cannot afford to lose principal violates FINRA rules.

C. Unauthorized Trading.
An advisor must have a client’s prior authorization before making any trade. The only exception is if the client has signed a written “discretionary trading” agreement, allowing the broker to trade an account. Even when a written agreement is signed, all purchases must be suitable for the client and must not benefit the advisor at the client’s expense. The advisor is a fiduciary when making decisions for a client. Fiduciaries are held to a higher standard of care, and must not further their own personal interests at the client’s expense. Therefore, they must act prudently, considering both the income needs of the client and the preservation of principal.


If a stockbroker or advisor trades without the clients’ authorization, this violates securities laws and regulations. Often unauthorized trading is also excessive trading. In these cases, stockbrokers and advisors are legally obligated to refund both losses and the fees and commissions they received from the trading.

Unauthorized trading is a violation of the securities laws and FINRA regulations. It is also considered a serious offense at brokerage firms. 

D. Over Concentrated Portfolios.
The most fundamental rule of wise investing is to diversify. No portfolio should have over 10% in any one investment. The opposite of a diversified investment portfolio is an “over concentrated” investment portfolio. This occurs when a stockbroker invests a large portion of a client’s assets in a single investment or market sector. For example, if a broker primarily recommends energy stocks, investors can find that they are exposed to a high level of risk, and suffer large losses.


All investment advisors must pass certain examinations to become licensed. They must be licensed in each state in which they have clients. It is a basic rule that they are licensed to assist the investing public, not to generate commissions and other compensation by abusing their clients. Even if an advisor is a “true believer” in a particular stock, or market sector, the industry has stringent “supervision” requirements that require his or her superior to review every trade, and every account on a frequent basis to avoid exposing clients to unsustainable risk of loss.

For a free initial consultation, contact Diane Nygaard at (913) 485-5014 or click here to send an e-mail describing your problem