Breach of Fiduciary Duty

• What is a fiduciary duty?
• What is the difference between a stockbroker, financial advisors, and an investment advisor? Do they all owe fiduciary duties to their customers and clients?
• What is the duty of loyalty under a fiduciary duty?

Breach of fiduciary duty is one of the most common claims asserted by investors in securities litigation and arbitration. Financial advisors or securities firms often have fiduciary duties to their clients. Under the “Best Interest” Test, a fiduciary is obligated to place the interests of the person to whom he owes the fiduciary duty (the investor) above his own interests. The relationship between an investor and a securities broker is that of principal and agent. Under the law, a securities broker is considered a fiduciary with respect to all matters within the scope of the agency. A fiduciary, like a trustee, is under the highest of duties - one that is, in the famous words of Judge Benjamin Cardozo, "something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior."

Securities fraud and breach of fiduciary duty are separate legal claims that often overlap. The same set of facts may give rise to both claims. Perhaps the most common situation occurs when a broker sells an unsuitable investment. It is both a fraudulent act and a breach of fiduciary duty for a broker to recommend an investment without a reasonable basis for believing that it is suitable for the investor. A fiduciary is charged with an obligation to provide diligent and faithful service similar to that of a trustee.

Since investors are encouraged to place their trust and confidence in their broker whom they rely upon for expertise in making the investment decisions, the broker is held to an extremely high standard not to abuse that trust. Acts of fraud and misrepresentations, unauthorized trading, unsuitable trading and churning will generally also be part of the basis for a breach of fiduciary duty claim. A broker may also be subject to liability as a fiduciary for a pension or retirement plan account under the Employee Retirement Income Security Act (“ERISA”).

When the term "financial advisor" appears on brokers' business card, instead of "account representative" or "stockbroker", investors often have the mistaken impression that their broker is on their side. It is a message many firms try to sell in their advertising, implying that their brokers are fiduciaries to their customers. However, when losses occur, and customers try to hold brokers to the fiduciary duty standard, brokers invariably argue that they owe only a “suitability” obligation.

In fact, the securities industry has long taken the position that securities brokers are not bound by the fiduciary standard of care and do not have to register as investment advisors when giving “incidental” investment advice or managing investments for a fee.

The fastest growing channel in financial services these days are those advisors who operate both as registered investment advisors and as affiliates of licensed broker-dealers. Advisors who are dually registered can (in theory) sell both fee-based advice and commission-based products. However as the SEC on its website admonishes newly-registered Investment Advisors that “As an investment adviser, you are a fiduciary to your advisory clients. This means that you have a fundamental obligation to act in the best interests of your clients and to provide investment advice in your clients’ best interests.”

The inherent conflict in the requirements of a fiduciary, and the sales-related compensation may provide the needed fodder to combat the “it’s the market downturn” performance argument to convince a Judge or an arbitration panel that the conduct of the advisor violated the spirit and the letter of the law.

As dually registered Advisor, it may not be possible to avoid self-dealing. The securities salesmen who decide that they could use the additional income stream that might come from their firm’s receipt of an asset based management fee, may find that they are not used to the work of actual financial planning for their clients, and of maintaining and changing recommended portfolio allocations. Active management may require that “hands on” management including monitoring of client portfolios and management, and acquiring software appropriate to the discretionary and supervisory authority necessary to comply with loss management requirements of more risk-averse clients.

No matter what the advisor calls him or herself, you should be able to show that the fiduciary breached his duty of care and loyalty to his or her client. Financial Planners that get most of their compensation as a result of sales are properly called sales people.

To help us evaluate whether you can seek recovery for "breach of fiduciary duty" we offer a free and confidential claim evaluation. Over the past 35 years, I have helped thousands of victims of stockbroker misconduct recover monies lost through breach of fiduciary duty. There are time limits that may apply, so call toll free at 1-800-637-3243 or locally at 860-677-4334. And be sure to call before you lose your rights!