Money Magazine Ask the Mole

Should I sue my adviser?

Probably not, even if you got bad advice. All the more reason to ask hard questions up front.

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By the Mole, Money Magazine's undercover financial planner

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(Money Magazine) -- I am frequently asked by clients if they should sue their previous adviser. This question usually comes up right after I've shown them how badly their portfolio has performed - and pointed out that the high fees they were paying only transferred their wealth to others. The client sits across from me in shock and says that his old adviser never disclosed those fees, or that she misrepresented how risky the investments were. That's when I get the lawsuit question.

First, I always point out that I'm not licensed to give legal advice. But then I tend to discourage clients from suing. What they were sold was ugly, but probably not illegal. Here's why.

If my client still has disclosure documents, such as the investment advisory agreement and the prospectus, I ask him to bring them in. Lo and behold, the nasty stuff like surrender charges, investment risks and formulas for calculating guarantees is usually buried deep within one of these documents. No one reads all of this paperwork, which works in favor of advisers who'd rather you just listened to what they say.

Another reason I generally tell people that suing would be an uphill battle is the next document I show them: a statement they signed that says they read and understood all of the disclosures. Every firm selling stocks, funds and insurance products has a compliance department that I believe exists to protect the firm from its clients.

The final reason suing is so tough is that you probably signed an arbitration agreement, thus waiving your right to go to court. And according to a recent study by securities consultant Edward O'Neal and arbitration attorney Daniel Solin, your odds of success in securities arbitration are only about 50%. Even if you win, the award is typically a small fraction of what's requested, sometimes not enough to cover the cost of the suit.

My advice: Don't put yourself in a situation where you later have to ask, "Should I sue?" That means not investing in a financial product or doing business with an adviser unless you understand what you're buying and what you're paying in total fees.

Before signing your name, ask your adviser to write down on one page what he considers the most important things you should know. If he merely tells you to read the documents, you can bet he's hiding something.

The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail To top of page

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