Breach of fiduciary is one of the most common claims investors make in FINRA arbitrations. Nearly every act of misconduct, negligence, or fraud arising out of how a stock broker or brokerage firm handles an investors’ securities accounts ties back to breach of fiduciary duty.
What is a Fiduciary?
A fiduciary has legal or ethical duty to act in the best interest of another person or entity. A fiduciary owes a duty of loyalty, care, and good faith to the beneficiary of their services. They also must act with honesty, fairness, and diligence in carrying out their responsibilities.
Financial Advisors and Broker-Dealers Owe a Fiduciary Duty to their Investor Clients.
Most legal authorities consider financial advisors and broker-dealers fiduciaries to their investor clients. That means, financial advisors and broker-dealers must put the investor’s interests before their own. If a financial advisor or broker-dealer fails to use the proper level of care; or fails to make decisions in the best interest of their investor clients, they can potentially be found liable for damages in a FINRA arbitration.
Assessing Motivations can Help Identify a Breach of Fiduciary Duty
There are infinite scenarios that can give rise to a breach of fiduciary duty. But cases involving fiduciary breaches often have a common thread.
One way to identify a breach of fiduciary duty is to weigh the fiduciary’s motivation to recommend something, against the potential benefit to the investor. This often boils down to compensation. How much does the broker or brokerage firm receive in exchange for the investor’s purchase of an investment? Understanding how financial advisors and broker-dealers get paid can help an investor make this assessment.
The amount of compensation that a financial advisor receives in exchange for a customer’s investment often provides clarity on whether the transaction was in the investor’s best interest, or in the financial advisor’s interest.
To be clear: financial advisors and broker-dealers—like all businesses—can charge fees for their services. But where the broker-dealer and/or financial advisor’s motivation to collect fees trumps what’s best for the investor customer, that can create the framework for a claim for breach of fiduciary duty in a FINRA arbitration.
Examples of Financially Motivated Breaches of Fiduciary Duty
Example:
Recommending a specific investment and omitting a high commission paid if the investor agrees to purchase the recommended investment.
Example:
Recommending a high-commission, speculative investment and misrepresenting the investment’s relative safety. A broker might misrepresent that the investment is safe to influence its purchase. In truth, the high-commission for the broker (and not the investor’s best interest) influenced the recommendation.
Example:
A broker-dealer might recommend an investment strategy that improperly incorporates the use of numerous brokerage accounts designed to generate exorbitant fees that an investor customer cannot easily identify.
Importantly, impure financial motivations are not the only indicator of breach of fiduciary duty. Breaches of fiduciary duty can also stem from misconduct that is not financially motivated. This includes breaches of fiduciary duty stemming from unsuitability, improper investment allocation, misrepresentations, and transactions that result in adverse tax consequences, among other things.
*The Law Offices of Patrick R. Mahoney is a full service law firm with extensive experience litigating cases involving a host of securities-related issues. This page is for information purposes only and does not constitute legal or investments advice; nor is it a comprehensive explanation of all churning of excessive trading issues. If you believe you have a claim, you should speak to competent counsel to better understand your options. Or, contact us.*
