Trust Your Broker: Suitability, Modern Portfolio Theory, and Expert Witnesses

Authors

Roger Reinsch, Northeastern Illinois University
J B. Reich, University of St. Thomas
Nauzer Balsara, Northeastern Illinois University

First Page

173

Document Type

Article

Abstract

The death of the "dot coms" in the late 1990's left many investors questioning investment advice. Specifically, they began to question the direction, interests, and professional competence of their stockbrokers. Investors who felt their stockbrokers failed them are increasingly resorting to litigation, pursuing what has become known as "suitability" claims, claims based on the argument that brokers recommended or purchased securities that were not suitable for an investor's profile. The issues in and surrounding suitability claims are complex, yet surprisingly little has been written on this topic. This article seeks to foster a much needed discussion and will examine the legal and ethical rules that govern stockbroker portfolio decisions, the causes of actions that clients may bring against their brokers based on suitability, and the use of expert witnesses in suitability litigation. There are two central components in this article, the Suitability Doctrine, and Modem Portfolio Theory. The Suitability Doctrine requires that stockbrokers know their clients and that any investment portfolio they create is suitable to their client's specific objectives and circumstances. Modem Portfolio Theory ("MPT") is a set of formulas used to determine, objectively, whether a portfolio is suitable for a particular client's objectives and circumstances.

Recommended Citation

Roger Reinsch, J B. Reich & Nauzer Balsara, Trust Your Broker: Suitability, Modern Portfolio Theory, and Expert Witnesses, 17 St. Thomas L. Rev. 173 (2004).
Available at: https://scholarship.stu.edu/stlr/vol17/iss2/2