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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:

  1. The duty of prudence;
  2. the duty of loyalty;
  3. the duty to follow plan documents; and
  4. 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)