• November 29, 2021
• Financial Industry Regulatory Authority

When it comes to understanding fiduciary responsibilities, it can be hard to know what that means and how it applies to investing in securities. Fortunately, the U.S. Securities and Exchange Commission issued some guidance to outline its expectations for financial advisors and what they owe their clients.

 

What Does the SEC Say?

 

SEC issued its interpretation of the Investment Advisers Act of 1940 in 2019, intending to clarify the fiduciary duties of investment advisers and broker-dealers who work with customers to buy and sell securities and develop investment plans that include securities transactions. The key takeaway is that there are two high-level duties regarding how financial advisors are supposed to treat their clients. Financial advisors uphold a duty of care and a duty of loyalty.

 

Duty of Care: What Does It Mean?

 

There are three primary parts to the duty of care standard: to provide advice that is in your best interest; to see the best execution of trades according to your goals; and to provide advice and monitoring of your portfolio throughout your business relationship.

 

You can expect your investment adviser or broker-dealer to work as if your goals are their goals, or in other words, in your best interests. Financial advisors should never take any action to enrich themselves over their clients. In considering each securities transaction or using securities to develop an investment portfolio, an investment adviser or broker-dealer should care only whether an action or piece of advice is suitable according to their client’s goals.

 

By talking with you and learning more about your investment experience and financial goals, a financial advisor can build and maintain an investment profile to use as a guide in offering advice and undertaking securities transactions for you. Part of this responsibility includes monitoring the performance of your securities investments and advising you of appropriate adjustments as frequently as is appropriate to your needs.

 

Duty of Loyalty: What Does It Look Like?

 

Financial advisors are also expected to disclose to you any conflicts of interest or murky relationships that may be or appear to be unethical. Their loyalty should be always towards you, their client, and not colleagues, business acquaintances, or other third parties. You can expect that your financial advisor will inform you of any facts that are relevant to your working relationship. These potential or actual conflicts must be resolved by the financial advisor. Or, you should have the opportunity to give informed consent regarding any potential conflict.

 

Fiduciary Duty Standards Apply in All Cases

 

Importantly, the SEC acknowledges that high standards of care and loyalty may be expressed in different ways depending on the needs, experience, and knowledge of the investor. Some elements of the business relationship are defined by the investment company that employs the financial advisor or broker-dealer. Regardless, the SEC established an expectation that a duty to care and loyalty applies to all aspects of the advisor/client relationship.

 

When There’s a Failure of Fiduciary Duty that Leads to Investment Loss, We Can Help

 

If your financial advisor fails to uphold either or both of the duties to care and loyalty, you may have legal recourse. The Wolper Law Firm, P.A. represents investors nationwide in securities litigation and arbitration on a contingency fee basis.  Matt Wolper, the Managing Principal of the Wolper Law Firm, P.A., is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at (800) 931-8452 or by email at mwolper@wolperlawfirm.com.