Liability investment adviser – a relevant topic, as it is important for investors to know to what extent they can rely on the advice given by an investment adviser and in which cases they can make claims against the investment adviser in the event of losses or damages.
Investment advisors are obliged to provide their clients with professional and comprehensive advice and to protect their interests in the process. If they violate these duties, e.g. by passing on false or incomplete information or neglecting their duty to inform, they can be held liable.
The topic of liability of investment advisors is therefore relevant for investors who have been advised by an investment advisor and want to defend themselves against the advisor in case of losses or damages.
However, it is also of interest to investment advisors themselves, as they should be aware of the cases in which they can be held liable and how they can protect themselves against them.
What does an investment adviser do?
An investment adviser is a person or company that provides professional advice to investors on managing their assets or selecting investment products.
Liability investment adviser: The responsibilities of an investment adviser usually include:
- The analysis of the investor’s financial circumstances and objectives
- The preparation of investment recommendations and strategies
- Advising on the selection of investment products
- The management of investment portfolios
- Monitoring and adjusting investment strategies
- Informing the investor of the risks and rewards of investment decisions
It is important to note that investment advisers do not necessarily sell investment products themselves, but only provide advice. However, they may carry out investment transactions on behalf of the investor and receive a commission for doing so.
When is an investment advisor liable?
The liability of investment advisors can arise from various legal bases. Two important bases of liability are:
1.Contractual liability: investment advisors are liable for damages arising from a breach of contractual duties. These duties may arise from the advisory contract or from statutory regulations, e.g. the Securities Trading Act. Examples of contractual breaches of duty are, for example, the breach of duties of disclosure or the brokerage of unsuitable investment products.
2.Tortious liability: Investment advisors can also be held liable on the basis of damages caused by an intentional or negligent breach of duty without the existence of an advisory contract. In this case, tortious liability is assumed. Examples of tortious liability cases are e.g. fraud or breach of duty of care.
Liability investment adviser: It is important to note that investment advisors cannot be held liable in every case, but that the individual circumstances of each case must always be taken into account.
Examples of liability cases involving investment advisors
Investment advisors can be held liable in the following cases:
- Misadvice: If investment advisors pass on false or incomplete information or recommend investment strategies that are unsuitable for the investor, they can be held liable.
- Breach of duty of disclosure: Investment advisors have statutory duties of disclosure, e.g. to inform the investor about the risks and opportunities of investment decisions. If they neglect these duties, they can be held liable.
- Breach of duties of care: Investment advisors also have a duty of care towards their clients. If they breach this duty, e.g. by not researching the relevant facts or by not adequately considering the investor’s investment behaviour, they can be held liable.
- Fraud: If investment advisors knowingly pass on false information or deliberately deceive investors in order to profit from them, they can be held liable for fraud.
It is important to note that these examples are not an exhaustive list and that the individual circumstances of each case must always be considered.
Exclusions of liability – can an investment adviser be exempted from liability?
In Germany, there is no possibility for investment advisors to be exempted from their liability for the consequences of their advice.
Under German law, an investment advisor is obliged to inform the client of the possible risks and opportunities of the investment he or she recommends and to provide advice tailored to the client’s individual needs.
If an investment advisor breaches these duties and the client suffers a loss as a result, the client can hold the investment advisor liable and claim damages. However, it is possible for an investment advisor to agree in its advisory contract on certain exclusions of liability that apply in the event of damage.
These disclaimers may state, for example, that the investment adviser is not liable for damages caused by political events, wars or natural disasters.
However, such disclaimers are usually only effective if they comply with legal requirements and are not to the detriment of the client.
If an investment advisor agrees on a disclaimer that does not comply with the legal requirements or disadvantages the client, this disclaimer is ineffective and the investment advisor remains liable.
When is a limitation of liability possible?
In Germany, there is no possibility to completely exclude the liability of investment advisors. Under German law, an investment advisor is obliged to inform the client of the possible risks and opportunities of the investment he or she recommends and to provide advice tailored to the client’s individual needs.
If an investment advisor breaches these duties and the client suffers a loss as a result, the client can hold the investment advisor liable and claim damages. However, there are some possibilities to limit the liability of investment advisors in Germany:
- Exclusions of liability in the advisory contract: An investment advisor can agree in his advisory contract on certain exclusions of liability that apply in the event of damage. However, these exclusions of liability must comply with the legal requirements and must not disadvantage the client.
- Protection by means of liability insurance: An investment adviser can protect itself by means of liability insurance, which will cover the client in the event of a claim for damages. However, a liability insurance cannot completely exclude the liability of the investment advisor, but only limit it.
- Compliance with legal requirements: An investment adviser can limit its liability by complying with all legal requirements that apply to its activities.
These include, for example, the obligation to inform the client of the possible risks and opportunities of the investment recommended by the advisor and to provide advice tailored to the client’s individual needs. If an investment adviser fulfils these obligations, he can limit the risk of liability.
Investment adviser liability: material findings and recommendations
The liability of investors and investment advisers can arise in a number of areas, such as errors in investment advice, misrepresentations or breaches of legal requirements. There are some key findings and recommendations that investors and investment advisers should bear in mind with regard to liability:
- Investment advisors have a duty to provide careful and comprehensive advice. They must inform investors about the risks and opportunities of the investment products they recommend and must not make any inaccurate statements.
- Investors share responsibility and should inform themselves thoroughly before making an investment decision. They should also be aware that every investment involves risks and that there is no guarantee that the capital invested will be preserved.
- Investors and investment advisors should carefully keep written documents, such as advisory protocols or investment contracts, in order to be able to present evidence in case of potential liability.
- In the event of a dispute, investors and investment advisors can try to reach an out-of-court settlement. If this is not possible, they can turn to an arbitration board or go to court.
- Investors and investment advisors should inform themselves in advance about the various liability insurance policies that can help in the event of claims for damages.
Liability investment adviser: It is important that investors and investment advisors know the relevant legal provisions and obligations and act accordingly in order to minimise liability risks.