California Attorneys Handling Breach of Fiduciary Duty Claims Against Financial Professionals
If you invest your money yourself and lose it, there is usually nowhere to turn for redress. But if you pay a professional for investment advice or to execute trades for you, then the game changes. The professionals whom you rely upon owe you certain duties of care called individually a fiduciary duty, and when they fail to live up to those duties, then you could have a legal cause of action against that professional.
There are two main types of professionals helping people invest: brokers and advisors. Perhaps the most important distinction between the two is the way their interactions with clients are regulated that defines the duties owed to investors.
Fiduciary Duty: The Difference Between a Broker and an Advisor
One of the most important distinctions between brokers and advisors is that advisors owe a fiduciary duty to their clients, which means they must exercise reasonable care and act in their clients’ best interest, while brokers may or may not have to live up to such a high standard.
Investment advisors registered with the SEC and/or a state regulator must put their clients’ best interest ahead of their own and can be held accountable for failing to do so, whereas brokers without a mandated fiduciary duty may not be held liable even if they recommend products that aren’t necessarily in your best interest or that may benefit the broker more than you.
This fiduciary designation is critical and is the reason why FINRA, the SEC and many others in the investment world highly encourage investors to research any financial professional and/or firm to find out whether a fiduciary standard applies. Working with an advisor who is bound by a fiduciary duty to act in your best interest may provide you with more legal options if the advisor fails to meet that standard.
What Are the Mandates of a Fiduciary Duty?
fiduciary duty are not necessarily black and white, but they are grounded in the establishment of a special relationship of trust and confidence between an advisor and client. The SEC in 2019 reaffirmed that investment advisors’ duties as a fiduciary “are not specifically defined … but reflect a Congressional recognition ‘of the delicate nature of an investment advisory relationship.’”
The SEC did, however, specify that investment advisors owe clients a duty of care and a duty of loyalty:
- Requires an investment advisor to provide advice in the best interest of the client, based on the client’s objectives.
- Requires the investment advisor to eliminate or fully disclose all conflicts of interest that may consciously or unconsciously taint their advice.
Do Brokers Ever Have a Fiduciary Duty?
Unlike advisors, brokers are not always held to a fiduciary standard. Rather, whether a broker owes a fiduciary duty to the client depends on the nature of the relationship between the broker and the client. The relationship is usually defined by the type of account involved; a discretionary account usually establishes a fiduciary duty whereas a non-discretionary account may not:
- A non-discretionary account is one in which the investor decides what trades to make. The broker’s role is simply to execute the trades that the investor wants. While the broker can make recommendations on what to buy or sell, the broker cannot do any buying or selling without the investor’s prior approval.
- A discretionary account (commonly called a “managed account”) is one in which the broker determines what to buy or sell and can do so without the investor’s prior approval.
With discretionary accounts, brokers are typically held to fiduciary standards because the broker is making trades for the investor often without the investor’s input, and courts therefore require the broker to act in the best interest of the client.
With non-discretionary accounts, fiduciary duties are not always so clear-cut. While the broker is not supposed to execute any trades without client approval, there are times when the broker does so, such as when a major market event is happening and the broker can’t contact the client in time. In situations like these, it can be argued that the broker has taken control over the non-discretionary account.
When a broker takes control over a non-discretionary account, courts typically hold that the broker owes the client the same fiduciary duty that they would have owed if the account had been discretionary in the first place. In such a situation, a court may find that the broker acted as a fiduciary and thus owed the investor a certain level of care. The broker must:
- Manage the account in a manner directly comporting with the needs and objectives of the customer;
- Stay informed regarding changes in the market affecting the customer’s interests and act responsively to protect those interests;
- Keep the customer informed as to each completed transaction; and
- Explain forthrightly the practical impact and potential risks of the course of dealing in which the broker is engaged.
The ultimate decision about whether a broker owes you a fiduciary duty is highly nuanced; there are more factors to analyze aside from whether your account was discretionary or not, but the discretionary/non-discretionary distinction is a good starting point.
Contact Our Attorneys If You Think an Advisor or Broker Failed to Act in Your Best Interest
To get a clear picture of your legal rights, you should speak with an experienced securities lawyer. The attorneys at Girard Bengali, APC, have handled fiduciary duty claims for decades, and we would be pleased to evaluate your potential case. Please call 866-778-6821 or contact us online to arrange a confidential free consultation where you can discuss your concerns with our lawyers.