Breaches of fiduciary duty are unfortunately common. Since the fiduciary duty is the highest legal standard of care, however, there are severe consequences for a breach of fiduciary duty. With the help of an investment loss recovery attorney, you can hold the fiduciary accountable for his or her misconduct.
What Is a Fiduciary Duty?
A fiduciary is a person entrusted to act in the best interests of another (i.e. the principal). Once the fiduciary agrees to the relationship, the fiduciary is bound by a set of legal and ethical obligations, known as fiduciary duties.
In general, all fiduciaries owe a duty of loyalty and a duty of care. Some fiduciaries will owe additional duties based on the relationship and the industry in which they are in.
The duty of loyalty requires fiduciaries to act in the best interest of the principa, avoid any conflicts of interest, and refrain from self-dealing. The duty of care means the fiduciary must make informed decisions based on all information available.
Fiduciary Duties of Financial Advisors
While all financial advisors have a duty of care to their clients, only registered advisors have a fiduciary duty. It is important to know whether your financial advisor is registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulating agency. Financial advisors who are not registered can make investments that benefit them, as long as the investment is within your stated objectives. A registered financial advisor, on the other hand, can invest only if it is in your best interest.
For registered financial advisors, the fiduciary duties owed vary by state. However, the following fiduciary duties apply to all registered financial advisors in all states
Duty to Recommend Suitable Investments
Prior to recommending an investment, the financial advisor must study and understand the investor’s objectives, tax status, and financial situation, among other things. Any investments that the financial advisor recommends must be suitable to the investor’s needs.
Duty to Inform Investor
A financial advisor must fully inform the investor of the risks associated with the purchase or sale of a security. The advisor cannot misrepresent any material facts regarding the transaction.
Duty to Act Promptly and with Authorization
All client orders must be performed promptly and with investor’s express consent. The advisor must obtain separate authorization for each investment unless the investor has a discretionary account.
Duty to Refrain from Self-Dealing
A financial advisor cannot initiate a transaction where he or she personally benefits.
Duty to Avoid Conflicts of Interest
For any recommendations made after June 30, 2020, financial advisors have a fiduciary duty to avoid any conflicts of interest. If unavoidable, the advisor must disclose the conflict to the investor.
What Constitutes a Breach of Fiduciary Duty?
A breach of fiduciary duty occurs when the fiduciary fails to act in the best interest of the principal. This can happen through an intentional act or failure to act.
There are four elements to a valid breach of fiduciary duty claim.
A fiduciary relationship must exist for the fiduciary to owe a duty. You must show that the fiduciary knowingly accepted that role to hold them to the fiduciary standard of care. This is typically shown through a written agreement between the parties, such as a customer agreement.
The fiduciary must act contrary to your best interests. A breach of fiduciary duty can be shown through deliberate acts, such as making decisions on your behalf without consent. You can also prove a breach through the fiduciary’s failure to act—for example, not disclosing a conflict of interest.
You must suffer actual harm or damages from the fiduciary’s breach. Proving there was a breach is not enough for a valid claim of breach of fiduciary duty. Damages can be either economic or non-economic, such as mental anguish.
There must be a direct causal link between the fiduciary’s breach and harm to you. Despite your damages, if they are unrelated to the fiduciary’s misconduct or an unforeseeable result of the breach, you cannot recover your losses.
What Are Common Forms of Breach of Fiduciary Duty?
Below are just a few examples of how a financial advisor can breach his or her fiduciary duty. In each instance, the fiduciary fails to act in the best interest of the investor.
Misrepresentation or Failure to Disclose Information
If a financial advisor does not present a client with all material information about an investment, this is a breach of fiduciary duty. Material information is what a reasonable investor would consider important when deciding whether to invest.
Sometimes financial advisors will mislead investors by omitting information, such as risk factors or any negative information about a stock.
Excessive trading, also known as churning, in your account is a breach of fiduciary duty. Financial advisors will make large numbers of trades solely to generate more commissions for themselves.
Financial advisors must “know their customer” before making investment recommendations. This includes understanding the client’s investment objectives, risk tolerance, time horizon, financial standing, and tax status. The advisor breaches their fiduciary duty if they make an unsuitable investment, even with the best intentions.
Failure to Diversify
Your financial advisor must recommend a mix of investments so that your assets are properly allocated among various asset classes and industries. Failing to diversify your portfolio puts you in a position of great risk and is a breach of fiduciary duty. If your assets are over-concentrated in a particular stock or sector, you may experience significant losses if the company or industry does not perform well.
Failure to Follow Instructions
When you give instructions to your financial advisor, they have the fiduciary duty to promptly perform your orders. If your advisor fails to follow your instructions in a timely manner and you suffer financial losses, you can recover.
What To Do If Your Financial Advisor Breached a Fiduciary Duty
If you lost money at the hands of your financial advisor, there are several potential courses of action. An experienced investor loss recovery attorney can walk you through the different options and recommend which is best for you.
You should first consider discussing the issue with your advisor or the brokerage firm’s compliance department. If you cannot resolve the issue, your next option may be mediation or arbitration through the Financial Industry Regulatory Authority (FINRA). Lastly, unless you waive your right, you can file a lawsuit against your financial advisor for breach of fiduciary duty.
Depending on the nature of the breach, your advisor could be civilly and criminally liable.
If you believe your financial advisor breached a fiduciary duty to you, contact The Law Offices of Robert Wayne Pearce P.A. We have over 40 years of experience representing those who have been wronged by a fiduciary and have recovered over $140 million in investment losses for our clients.
Our team of devoted attorneys understands the complexity of these types of cases. We can provide you with the support to protect yourself and recover your losses. Contact us for a complimentary review of your case.