Investors often turn to mutual funds to save for financial goals, such as retirement.
A mutual fund is a Securities and Exchange Commission-registered investment company that pools money from many investors. It then invests the money in stocks, bonds, short-term money-market instruments, and other securities.
An SEC-registered investment adviser manages the mutual fund’s portfolio, which consists of the combined securities and assets that the mutual fund has invested in.
What are Mutual Funds?
There are four main types of mutual funds — money market funds, bond funds, stock funds, and target date funds.
Money market funds can, by law, only invest in certain high-quality, short-term investments issued by U.S. corporations, and federal, state and local governments.
Bond funds invest in all types of debt instruments. Some bond funds may only invest conservatively in low-risk debt instruments, while other bond funds may invest aggressively in high-yield debt instruments.
Stock funds, which invest in corporate stocks, can vary widely from fund to fund. For example, an index fund would track a particular market index, whereas an income fund would invest in stocks that pay regular dividends. Some stock funds invest only in conservative stocks, while other stock funds may invest in aggressive stocks.
Target date funds, which hold a mix of stocks, bonds, and other investments, are designed for investors with particular retirement dates in mind.
Common Areas for Misconduct Related to Mutual Funds
As with any investment, misconduct by your stockbroker or investment advisor may cause investment losses in mutual funds. The following are several examples of misconduct in the mutual fund context:
Failure to Disclose Costs or Conflicts of Interest
If an advisor or brokerage firm does not disclose that the mutual fund costs more than other similar mutual funds, you may have a claim. Or if your financial advisor does not disclose that it receives larger commissions from a particular mutual fund that it has recommended, that too may constitute actionable misconduct.
Excessive Mutual Fund Trading
If a stockbroker engages in frequent trading of your mutual funds, this should be a red flag. Mutual funds are not considered trading vehicles and are usually meant to be held for an extended period of time.
Mutual fund churning (or switching) is the illegal practice of conducting excessive mutual-fund trading to generate greater commissions. A broker that advises switching from an existing mutual fund to a new fund within a short period of time is likely benefiting only his or her firm at your expense. This is because every time you switch to a new fund, you are required to pay “switch fees.” Meanwhile, your stockbroker earns additional commissions for each switch transaction.
Mutual funds offer discounts on commissions to investors who make larger investments. The “break point” is the level at which the investor qualifies for a reduced sales charge.
Brokerage and advisor firms must disclose the break-point levels. If your financial advisor recommends a purchase that is just below the break point, you may have a valid legal claim.
Recovering Your Mutual Fund Losses
If you believe you have been the victim of brokerage or advisory firm misconduct, we can help.
The Morgan & Morgan Business Trial Group helps investors recover their financial losses on a contingency basis. We are only paid if we successfully recover money for you.
The Business Trial Group is backed by the size and skill of the largest contingency law firm in the nation – with more than 700 lawyers and offices throughout the country. We have the resources and experience to battle against the nation’s largest brokerage firms, investment advisory firms, and banks, whether in court or arbitration.