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As an investor, you may have heard that your financial advisor has a “fiduciary duty” toward you. You may also have heard that breaching this duty can result in sanctions or other penalties for your financial advisor.

The relationship between you and your financial advisor is special because you are relying on them for advice about your finances.

As your wealth grows, it becomes more and more important to be able to rely on this advice and trust that your financial advisor is only doing what is best for you. The law recognizes this by imposing special obligations, called fiduciary duties, on financial advisors.

What Is a Fiduciary Duty?

The relationship between an investor and a financial advisor is a special kind called a “fiduciary relationship.” A fiduciary is a person that acts on behalf of someone else, called the principal, to the benefit of that principle.

A fiduciary duty is a legal responsibility a fiduciary owes to the principal. Depending on the context of the fiduciary relationship, this duty may take different forms. In general, however, a fiduciary must

  • Put the client’s best interests above their own;
  • Avoid conflicts of interests or disclose them when they arise; and
  • Act with honesty, good faith, and loyalty toward the principal.

Under the Investment Advisers Act of 1940, only registered financial advisors are fiduciaries. Broker-dealers, on the other hand, are regulated by the Financial Industry Regulatory Authority (FINRA). FINRA Rule 2111 holds brokers to the lower standard of “suitability.”

The most important difference between the two is that a fiduciary is required to put their principal’s best interests above their own at all times; suitability merely requires a broker-dealer to make investment decisions that are “suitable” based on their client’s investment profile.

What Constitutes a Breach of Fiduciary Duty?

In its simplest form, a breach of fiduciary duty occurs when a fiduciary acts in their own interest, rather than in the best interest of their client. A financial advisor can breach this duty in a variety of ways.

For example, one of an investment advisor’s primary responsibilities is properly managing their client’s investment account. Part of their fiduciary duty is managing that account with the appropriate level of professional skill.

Failing to conduct proper due diligence on investment or failing to inform their client of an important fact about an investment constitutes a breach of the advisor’s fiduciary duty.

Other common examples of an investment advisor’s breach of their fiduciary duties include

  • Using an investor’s funds for the fiduciary’s own personal gain;
  • Engaging in or failing to disclose a conflict of interest;
  • Taking an investment opportunity for themselves, rather than for the client;
  • Commingling an investor’s money with the fiduciary’s own funds; or
  • Engaging in any transaction without permission from the investor.

Investors should always pay careful attention to the conduct of their financial advisors to make sure they are acting in the investor’s best interest.

Breach of Fiduciary Duty Damages That Are Available

If you suffered investment losses because your financial advisor gave you bad advice, you may be able to recover some of those losses based on your financial advisor’s breach of their fiduciary duty.

An advisor’s breach of fiduciary duty generally entitles you to damages up to the amount you lost because of the breach.

However, the actual damages calculation is often more complex than that. Experienced investment fraud attorneys familiar with fiduciary duty cases can help you determine how much compensation you can receive. 

In some cases, you may be able to seek punitive damages from your financial advisor in addition to regular compensation. Rather than compensate the victim, punitive damages punish the wrongdoer.

Accordingly, they are usually reserved only for misconduct that is particularly severe. Punitive damages are not limited by your actual losses, so they may be much higher than compensatory damages.

How to Prove a Breach of Fiduciary Duty

Compared to fraud or negligence, proving breach of fiduciary duty is fairly simple. To succeed on a claim for breach of fiduciary duty, you must prove: 

  • The existence of a fiduciary duty, 
  • A breach of that duty, and
  • A connection between the breach and your losses. 

Additionally, your financial losses must be real; in other words, you won’t get compensation based on money you could have made. Similarly, you won’t receive any compensation for your financial advisor’s misconduct if you didn’t actually lose any money.

If you’re unsure whether your financial advisor breached their fiduciary duty toward you, contact an investment fraud attorney right away. Our firm can help you assess your relationship to your financial advisor, measure your damages, and help you maximize your recovery.

How to Avoid a Breach of Fiduciary Duty

As an investor, it is not your responsibility to avoid breaching fiduciary duties.

However, you can always protect yourself and your investments by paying close attention to your financial advisor. A vast majority of financial advisors want to do right by you, but because there are some unscrupulous advisors out there, you should always stay alert.

Contact an Investment Fraud Attorney Today

At the Law Offices of Robert Wayne Pearce, P.A., we have been helping investors recover from financial advisors and brokerage firms for over 40 years.

If you believe your financial advisor breached their fiduciary duty, we can help you too. Contact us today for a free consultation.

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