THE BARNES WALKER EDUCATIONAL SERIES
Securities Losses from the Coronavirus
It is likely many of you, your friends, family, and business associates have recently suffered substantial losses to your portfolios, 401(k) plans, deferred compensation plans, and related investment accounts. The question you must first ask is whether this was the fault of the market or was it primarily the fault of bad investment planning and advice by your broker. To this end, we suggest you consider the following:
The majority of losses arising from this falling market relate to the issue of “concentration.” Concentration is either 1) your portfolio was concentrated too highly in one type of security, such as stocks, bonds, commodities, etc., or 2) your portfolio was concentrated in a sector of the market and that sector performed considerably worse than the market overall. It is no defense that the broker did not know that those sectors were going to be negatively affected by the Coronavirus. The fundamental strategy of diversification is that you are not concentrated in one or a few types or sectors. For example, the elderly should not be concentrated in stocks. It is a broker’s duty either under the suitability rule or as a fiduciary, depending on the circumstances, to work with their client to avoid overconcentration because in a falling market, the damages resulting from overconcentration are often substantial. The amount of these damages can be determined by a comparable-well-managed damages analysis.
Comparable-well managed damages are premised on how your account would have measured up against a well-managed account. This analysis provides two benefits: the first enables a statistical analysis of the investor’s broker performance against alternate market measures; the second is it allows an alternative theory of damages, i.e., the difference between a well-managed account and the investor’s account. This portfolio analysis and damage comparisons enable an investor to weigh the culpability of his or her broker on an empirical basis as opposed to guesswork and speculation, and it enables the attorney to better counsel the client as to his or her claim for broker negligence.
Your stockbroker is responsible for proper portfolio management – this concept requires, in part, that an investor’s portfolio can survive the occasional bear markets with no long-term permanent damage. The use of margins often undermines this strategy because a falling market results in margin calls causing the liquidation of often solid positions. The average long-term investor should not use margins for investing, and if the broker advised, or otherwise supported, this strategy, the broker and his company may have breached his/her duty to his/her client.
Similarly, for long-term investors, options are not suitable. Options are for short-term trading, market timing, and speculation. Investors who were in short market puts in this Coronavirus freefall likely got devastated. A broker advising or otherwise supporting this strategy may be responsible for these losses if this strategy was not suitable for the investor.
The analysis of portfolio losses typically requires the engagement of independent experts used by a lawyer in reviewing the claim. It is not an analysis an investor is ordinarily capable of without specific training and education. Barnes Walker itself uses several consulting firms for this purpose. Should you have any questions concerning the contents of this article, please feel free to contact attorney Andre Perron at BTolerton@BarnesWalker.com, and you can visit his website at TheFinancialLawyer.com or BarnesWalker.com.
Important Note: The information contained in the preceding Barnes Walker Educational Series article is summary in nature, does not cover all aspects of the law as it pertains to investment loss claims and is sent for educational purposes only for the benefit of clients, sellers, buyers, and members of the Realtor® Association of Sarasota and Manatee, Inc., of which we are a proud affiliate member. This article should not be considered as legal advice for anyone’s situation nor is it intended as specific or detailed advice, as we do not have any information specific to anyone’s circumstances. Further, the preceding article is not intended to be an all-inclusive discussion of investment loss claims, but a guide to the same, and there may be other matters not described in the article that may impact someone’s particular situation. Therefore, always seek legal advice regarding your unique circumstances. Finally, this article is intended as a public service and is not a solicitation seeking legal employment of our firm by anyone.