A Broker’s Failure to Follow Your Directions

Generally, brokers and other financial professionals have a duty to follow your instructions regarding the entry and execution of orders. A failure to follow your instructions, both as directed and in a timely manner, is a violation of industry rules, and may even result in a breach of the broker’s fiduciary duty to you. While there is some debate about whether a stockbroker is a fiduciary for the entire broker/investor relationship, depending on the facts and circumstances, the law in most states is clear that a broker owes you a fiduciary duty from the time you give or authorize an order until the execution of that order. If you incur financial harm due to your broker’s failure to follow your instructions, you are entitled to seek damages, fees, and costs stemming from those losses.

If you give your broker an order to buy or sell a specific investment, and the broker fails to timely submit that order or fails to submit the order with the correct terms (price, number of shares, type of order- market order, limit order, good til canceled), the broker violated his or her duty to you. Timeliness is especially important when buying and selling securities, and a broker’s failure to act promptly could cost you significantly.

FINRA has specific rules that address handling your account on a discretionary basis. Stated simply, your broker must have WRITTEN APPROVAL to exercise any discretion when buying or selling securities on your behalf, and that written grant of discretion must be approved by the brokerage firm. Claims related to a broker’s discretion, or lack thereof, are often referred to as “Unauthorized Use of Discretion,” and FINRA makes clear that such practice is a violation of its rules and protocols. Many brokers still use what is often referred to as “time and price discretion,” which describes a practice whereby a broker might get your permission to buy a certain stock, but the price, number of shares, and the time of day or the day of the week the broker submits the order to the market is left to the discretion of the broker. While this may have been accepted, even permissible in a prior era, it is impermissible now. If your broker is trading your account and is using any measure of unauthorized discretion about the order, it is a violation of FINRA rules and may entitle you to recover any damages caused by the broker’s misconduct.

Another example of a broker’s failure to follow instructions occurs when you specifically tell your broker to buy or sell a certain security, in a certain amount, or at a certain price, and your broker fails to submit that order to the market, instead adopting a “wait and see” attitude, hoping the price will improve. That practice, even if verbally authorized by you, is a violation of FINRA rules and protocols. In addition to violating the FINRA rules relating to discretion, your broker breached a fiduciary duty owed to you. If your broker engages in this practice, you should be entitled to any damages/losses suffered if the market moves against you between the time of giving the broker the order, and the time the order was actually executed.

It should be simple — get a specific order and timely submit it to the appropriate market, right? So why might a broker fail in this regard? A broker may fail or refuse to follow your directions for a variety of reasons. Higher commissions or other financial incentives may entice a broker to disregard your directions. Greed. A desire to be the “hero” with the hope they will make more money for you, and resulting in higher commissions for them. Markets, however, often move the other way, and the broker’s unlawful exercise of discretion could be the reason for your losses. In this instance, your broker is putting his/her interests above yours. Brokers are in a unique position in that they can personally benefit from your investment decisions, which results in a conflict of interest situation in the broker/investor relationship. Additionally, your broker may think they are smarter than you, or they may disapprove of your investment strategy. Or, your broker may simply neglect or forget to place the order. The reason, however, is of minor significance, as the failure to follow your directions is a breach of your broker’s duty to you, and they should be held responsible for any losses you incur.

Your broker should discuss each order specifically and seek your approval. Your broker’s failure to act at your direction is a breach of their duty to you, and you may be entitled to recoup your losses and/or any damages that result from that breach.

We understand that when you choose a broker to handle your investments, you are placing your financial livelihood in their hands. You expect your broker to specifically follow your directions and to always act in your best interests at all times. Unfortunately, that is not always the case. If you believe your broker failed to follow your directions or that your broker breached his or her duty to you, we would like to hear from you. Call us at (512) 306-8188 or contact us online.