A fiduciary duty is the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty, is typically referred to as the principal or the beneficiary.
In the securities industry, a fiduciary relationship exists between the client investor and the brokerage firm, financial advisor, or investment advisor. A fiduciary duty can arise through written agreement, statute, or a verbal agreement in which the investor places trust and confidence in another person. Over the years, the legislature and courts have defined the fiduciary responsibility of brokerage firms, financial advisors, and investment advisors to include the following:
- Understand the nature of the investment’s risks, rewards, and strategy before recommending the investment;
- Make only suitable recommendations to the investor based upon the investor’s objectives, needs, and circumstances;
- Furnish information to the investor that would be material to the investor’s decision about the investment recommendation;
- Not misrepresent or omit material information; and
- Refrain from self-dealing.
In 2019, the Securities and Exchange Commission (“SEC”) created Regulation Best Interest, also known as Regulation BI, which established a “best interest” standard of conduct for broker-dealers and Financial Advisors when making recommendation to clients. Regulation BI is codified in the Code of Federal Regulations at https://www.ecfr.gov/current/title-17/chapter-II/part-240/subject-group-ECFR64f52d737aea1ed/section-240.15l-1.
Regulation BI provides that a “broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.” In other words, the broker must always put the client’s interest first.
Regulation BI further provides a number of disclosure requirements so that clients are fully apprised of the characteristics, risks, costs and other materials facts associated with every transaction.
With the growing trend of FINRA registered Financial Advisers transitioning to “fee-only” Registered Investment Advisors, it is also important to understand the fiduciary obligations that exist pursuant to the Investment Adviser’s Act of 1940. The SEC and a legion of courts across the country have interpreted the fiduciary duty standard imposed by the Investment Adviser’s Act of 1940. It is well settled that pursuant to the fiduciary standard, Investment Advisers owe both a (1) duty of care and a (2) duty of loyalty to their clients. See 17 CFR Part 276 (Commission Interpretation Regarding Standard of Conduct for Investment Advisers). The fiduciary duty is broad and applies to the entire adviser-client relationship. See Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979).
The duty of care requires that the adviser provide investment advice that is in the best interest of the client, including a duty to provide advice that is suitable for the client. See SEC v. Capital Gains, 375 U.S. 180 (1963). In order to provide such advice, an adviser must have a reasonable understanding of the client’s objectives, including his/her investment profile. Significantly, according to the Supreme Court of the United States, the duty of care encompasses the duty to provide advice and monitoring at a frequency that is in the best interest of the client, taking into account the scope of the agreed relationship. Id. at 194. The SEC has specifically stated that “when the adviser has an ongoing relationship with a client and is compensated with a periodic asset-based fee, the adviser’s duty to provide advice and monitoring will be relatively extensive as is consistent with the nature of the relationship.” See 17 CFR Part 276 at p. 20.
The duty of loyalty requires that an adviser not subordinate its clients’ interests to its own and, instead, place the client’s interests first. In order to satisfy the duty of loyalty, the adviser must, among other things, make full and fair disclosure of all material facts relevant to the relationship and the capacity in which the adviser is working. The adviser must also eliminate conflicts of interest and/or provide the client with the opportunity to give informed consent regarding all potential conflicts.
If an adviser fails to satisfy either one of these duties, he/she/it has breached fiduciary duties to the customer, giving rise to a cause of action.
How Can I Tell If My Broker Breached A Fiduciary Duty Owed To Me?
While nobody can predict the day-to-day movements of the financial markets and predict precisely how your investment portfolio will perform, financial advisors are obligated to act in accordance with applicable laws and regulations, which require them to conduct themselves in the manner outlined above in order to minimize the likelihood that clients will experience substantial losses.
If your portfolio has seen sudden or significant losses, or if you suspect your broker has acted in any way that is careless or improper, we encourage you to contact our office. Every situation is different, but by talking with an attorney who is experienced in handling claims involving breaches of fiduciary duty, you can get a strong sense of whether you might have a case and how much it might be worth.
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In the event a fiduciary duty is breached, the fiduciary may be held responsible for the financial harm caused. The Wolper Law Firm has extensive experience handling claims involving breaches of fiduciary duty both in court and arbitration. If you have any questions about whether your investment professional has breached his/her fiduciary duties, please contact the Wolper Law Firm at 800.931.8452 for a free consultation and case evaluation.