FINRA arbitrators’ $519,000 message to Morgan Stanley: Small profits were not enough

It often takes large losses for an investor to consider suing his or her stockbroker or financial advisor.  However, experienced FINRA arbitration attorneys know that investors may have a claim even if their portfolio realized modest gains.  In evaluating a potential claim, a good attorney will not only analyze actual investment losses — sometimes referred to as “net-out-of-pocket” losses — but also theoretical investment losses had the investor been properly advised, known as “well-managed portfolio” damages.

Under this second method of analysis, a modest gain in an investor’s portfolio could, depending heavily on the facts, actually translate into substantial losses.

A FINRA arbitration award in New Mexico, published on May 17, is a recent example of an investor who had modest gains winning substantial damages based on the well-managed portfolio theory.

In that arbitration (Balok v. Morgan Stanley, FINRA Case No. 16-03473), the FINRA panel ordered Morgan Stanley to pay the Baloks $519,089.  A copy of the arbitration award can be found here. The arbitrators stated that the $519,089 was for “compensatory damages” without providing much detail.  However, an article in the Financial Advisor Magazine, available here, shines some light on the underlying facts.

As reported by Financial Advisor Magazine, the Baloks held approximately $1 million in a portfolio that was managed by Morgan Stanley.  Over a ten-year period, the Baloks made a profit of approximately $120,000 off their $1 million portfolio.  The Baloks’ attorney argued that Morgan Stanley placed the Baloks in unnecessarily complex investments that performed poorly.  Had the Baloks been properly diversified in conventional investments (60% stocks and 40% bonds) they would have seen another $519,000 in gains, according to the report.  Morgan Stanley undoubtedly maintained that the Baloks were not entitled to any damages because they had not lost a single cent of their investment and, in fact, made a six-figure profit.  But the FINRA arbitration panel disagreed, and awarded the customers half a million dollars under the well-managed portfolio theory of damages.

Cases like this demonstrate that investors may have a FINRA arbitration claim against their stockbroker or financial advisor even if they realized small gains on an investment.

If you believe that your stockbroker or financial advisor sold you investments that did not perform well and were not suitable, please call the FINRA arbitration attorneys at Epperson & Greenidge at 877.445.9261 for a free consultation or send us an inquiry through our website.