Breach of Fiduciary Duty
A brokerage firm has fiduciary duty to put the clients’ interests before the firm’s interests. Investment recommendations that fail to put the customer’s interest first constitute a breach of fiduciary duty. Cases that involve breaches of fiduciary duty typically arise in situations where the brokerage firm makes an investment recommendation to a customer designed to generate compensation for the firm, irrespective of the investment objectives and/or risk tolerances of the customer.
Claims for breach of fiduciary duty often provide the basis for related claims such as, churning or excessive trading; unauthorized trading; and unsuitability.
There are four generally recognized duties that fiduciaries are expected to honor. These four duties are codified in The Employee Retirement Income Security Act (“ERISA”). They are:
- The duty of prudence;
- the duty of loyalty;
- the duty to follow plan documents; and
- the duty to diversify;
Under ERISA, failure of fiduciary to honor any of the above obligations constitutes a breach of fiduciary duty, and can subject to fiduciary (i.e. the financial advisor) to liability to the principal (i.e. the customer)