Filing Claims Against Financial Advisors: What You Need to Know

Financial advisors are trusted to manage investments and provide sound financial guidance, but not all act in their clients’ best interests. When misconduct occurs—such as giving poor advice, misrepresenting risks, or engaging in fraud—investors may have the right to file a claim to recover losses.

Taking action requires understanding the available options and legal processes. Knowing how to gather evidence, navigate dispute resolution methods, and follow proper filing procedures can improve the chances of a successful outcome.

Reasons for Filing a Claim

Investors rely on financial advisors to manage their money responsibly, but when that trust is broken, financial losses can follow. One common issue is unauthorized trading, where an advisor makes transactions without permission, exposing the investor to unnecessary risks, particularly with high-risk securities.

Excessive trading, or churning, is another problem. This occurs when an advisor makes frequent trades to generate commissions rather than benefit the client. Repeated buying and selling of the same stock without a clear strategy can indicate that the advisor is prioritizing their own earnings over the client’s financial well-being.

Misrepresentation and omission of material facts also justify a claim. If an advisor provides misleading information about an investment’s risks or fails to disclose crucial details, investors may make poor decisions. For example, downplaying a stock’s volatility or failing to mention high management fees can lead to avoidable losses.

Breach of fiduciary duty is another serious concern. Advisors registered as fiduciaries are legally required to act in their clients’ best interests. Recommending investments that benefit the advisor—such as directing funds into products with high commissions or hidden fees—may violate this duty.

Types of Dispute Resolution

Disputes with financial advisors can be resolved through mediation, arbitration, or litigation. Each method has different procedures, costs, and outcomes.

Mediation

Mediation is an informal process where both parties attempt to reach a settlement with the help of a neutral third party. The mediator does not make a binding decision but facilitates discussions to help both sides find common ground.

This approach is typically faster and less expensive than arbitration or litigation. The Financial Industry Regulatory Authority (FINRA) offers a mediation program where cases are usually resolved within a few months, compared to arbitration or litigation, which can take a year or more.

Mediation works best when both parties are willing to negotiate. If an advisor or firm refuses to cooperate, mediation may not be effective. However, if an agreement is reached, it is documented in a legally binding settlement, preventing further legal action on the same issue.

Arbitration

Arbitration is a more formal process where a neutral arbitrator or panel reviews evidence and makes a binding decision. Most financial advisors and brokerage firms require clients to agree to arbitration clauses in their contracts, meaning disputes must be resolved this way instead of in court.

FINRA operates one of the most common arbitration forums for investor disputes. Investors filing a claim through FINRA arbitration must submit a Statement of Claim outlining their allegations and damages sought. The process includes hearings where both sides present evidence, and arbitrators issue a final ruling. Arbitration decisions cannot be appealed.

Arbitration is generally faster and less costly than litigation, but it has drawbacks. Unlike court proceedings, arbitration rulings are not public, reducing transparency. Additionally, arbitrators often have industry experience, which can sometimes raise concerns about impartiality. Despite these issues, arbitration remains a widely used method for resolving disputes.

Litigation

Litigation involves taking a dispute to court, where a judge (and sometimes a jury) determines the outcome. This option is generally pursued when mediation or arbitration is not available or when an investor believes their case warrants a public trial. Unlike arbitration, court decisions can be appealed.

One advantage of litigation is the ability to conduct discovery, where both sides request documents, interview witnesses, and gather evidence. This is useful in cases involving fraud or complex financial misconduct. Additionally, court rulings are public records, which can help expose unethical practices and deter future misconduct.

However, litigation is often the most time-consuming and expensive option. Legal fees, court costs, and expert witness expenses add up quickly, and cases can take years to resolve. Many financial advisory agreements include mandatory arbitration clauses, limiting an investor’s ability to sue in court. Before pursuing litigation, investors should review their contracts and consult with an attorney.

Evidence Collection

Building a strong case requires well-documented proof of misconduct or negligence. Account statements provide a detailed record of transactions, fees, and portfolio changes. Reviewing these statements can reveal unusual withdrawals, unexplained losses, or investments that do not align with the client’s stated risk tolerance.

Written communication is also key. Emails, text messages, and meeting notes can reveal instances where an advisor misled a client, made false assurances, or failed to disclose relevant information. For example, if an advisor downplayed the risks of a financial product in an email but later claimed the client was fully informed, this contradiction could strengthen the case. Detailed records of conversations, including dates and summaries, can also demonstrate whether an advisor provided conflicting or misleading advice over time.

Regulatory filings and disciplinary history provide additional evidence. The FINRA BrokerCheck database allows investors to review an advisor’s professional background, including past complaints, regulatory sanctions, or arbitration awards. If an advisor has a history of similar allegations, this can support a claim by showing a pattern of unethical behavior. Additionally, firms registered with the Securities and Exchange Commission (SEC) file Form ADV, which discloses conflicts of interest, fee structures, and disciplinary actions. Comparing these disclosures to an advisor’s actual conduct may uncover inconsistencies that further support a claim.

Expert opinions and financial analysis can also be valuable. A forensic accountant or investment expert can examine trading activity, fee structures, and portfolio allocations to determine whether an advisor acted improperly. These professionals can also quantify damages by calculating how much an investor lost due to improper recommendations.

Filing Procedures

Before filing a claim, an investor must determine the appropriate venue based on their agreement with the financial advisor or firm. Most brokerage firms include pre-dispute arbitration clauses in client contracts, which typically require claims to be filed through FINRA. If the advisor operates under a fiduciary standard, such as a Registered Investment Adviser (RIA), disputes may fall under the jurisdiction of the SEC or state regulators.

Once the proper forum is established, the next step is drafting a Statement of Claim. This document outlines the allegations, supporting evidence, and the damages being sought. It should be precise and well-documented, detailing specific transactions, misrepresentations, or breaches of duty. If filing through FINRA arbitration, the claim must comply with Rule 12900 of the FINRA Code of Arbitration Procedure, which sets requirements for formatting, content, and filing fees. Investors seeking damages of less than $50,000 may qualify for simplified arbitration, which expedites the process by allowing a single arbitrator to decide the case without a hearing.

After submission, the respondent—typically the advisor or brokerage firm—has a set period to answer, usually within 45 days under FINRA rules. Their response may acknowledge certain facts, deny allegations, or present counterclaims. If the dispute is handled by a regulatory agency, such as the SEC or a state securities commission, additional investigative steps may follow, including requests for further documentation or interviews with involved parties.

Potential Outcomes

The resolution of a claim depends on the dispute resolution method used, the strength of the evidence, and the specific allegations involved. Some cases result in full compensation for investor losses, while others lead to partial recovery, settlements, or dismissed claims.

A favorable ruling in arbitration or litigation can lead to monetary compensation, including reimbursement for losses, interest, and sometimes punitive damages. In some cases, advisors or firms may also be required to cover the investor’s legal fees. However, even if an investor wins, collecting the awarded amount can be difficult if the advisor lacks sufficient assets or if the firm has declared bankruptcy.

Not all claims lead to financial recovery. If arbitrators or a court determine that the advisor did not violate any regulations or contractual obligations, the claim may be denied. Some cases are dismissed due to procedural issues, such as missing filing deadlines or failing to provide sufficient evidence. In cases where a regulatory body like the SEC or FINRA investigates the advisor, disciplinary actions such as fines, suspensions, or bans from the industry may occur, even if the investor does not receive direct financial restitution.