Securities Arbitration

Types of Claims

Breach of Fiduciary Duty

Financial professionals who owe a fiduciary duty to their clients are legally obligated to act within their clients’ best interests, particularly when faced with conflicts of interest.  Many conflicts of interest can arise in relationships between financial professionals and their investment clients:

  • Financial professionals may earn commissions on each trade they execute on behalf of their clients. This may influence professionals to place more trades than is in the best interest of their clients to increase their commissions at their clients’ expense.
  • Financial professionals may earn different commission rates on different investment products they recommend their clients. This may influence professionals to recommend unsuitable investments that pay higher commissions.
  • Financial professionals may have incentives to recommend certain types of accounts to their investor clients, like futures or margin accounts, which are inappropriate for the clients when considering their investment objectives and financial status.

In these scenarios, financial professionals breach their fiduciary duty owed to their clients by placing their interest ahead of the clients’ interests.  When this duty is breached, investors have a right to pursue claims to recover their resulting losses.

Investors generally assume the financial professionals they hire will act within their best interests.  However, whether a financial professional legally owes a fiduciary duty to their clients depends on the applicable state and federal laws and the facts and circumstances of each situation.  Moreover, facts and circumstances, such as an investor’s age and investment experience, may dictate the scope of a fiduciary duty that is owed.  Even when a fiduciary duty may not exist, there are other legal avenues that can be used to pursue recoveries for investors’ losses caused by their financial professionals.  These issues involve complex legal analyses that are best discussed with a securities attorney.  If you believe your financial professional did not act in your best interest, contact Marquardt Law Office LLC for a free evaluation.

Generally, two types of financial professionals handle individual investors’ accounts: (1) investment advisors and (2) brokers.

Investment Advisors

Investment advisors are governed by the Investment Advisers Act of 1940, which dictates that they owe their clients a fiduciary duty.  It is not always clear to investors whether their professional is a “broker” or “investment advisor,” but, in general, investment advisors commonly exercise discretionary authority to manage their clients’ investments and are associated with firms that are registered with the Securities Exchange Commission and state regulators as Registered Investor Advisers.  The fiduciary duty owed by investment advisors requires that, on an ongoing basis, they act with the “utmost good faith, and full and fair disclosure of all material facts, as well as an affirmative obligation to employ reasonable care to avoid misleading.”  SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1964).  The ongoing duty of investment advisors may be to continually assure that their clients are invested in suitable investments.  This differs from brokers who, depending on the jurisdiction, may only have a transactional fiduciary duty to ensure suitability at the time a recommendation is made, and then not again until another transaction is made.

Brokers

Brokers may also provide investment advice, but they are not governed by the Investment Advisers Act of 1940.  Instead, brokers and their firms are required to register with the Financial Industry Regulatory Authority (FINRA) and adhere to FINRA’s rules.  Some states impose a fiduciary duty on all brokers, while other states impose a fiduciary duty on a broker only when a client imposes trust and confidence in the broker.  When a broker has a fiduciary duty, the rules of FINRA and other regulators help define the duty, which includes the duty to:

  • recommend investments only after sufficiently studying them and becoming informed of their nature, price, risks, and financial prognosis;
  • inform customers of the risks involved with particular investments;
  • disclose any personal interests the broker has in investments that are recommended to their clients and refrain from self-dealing; and
  • not misrepresent any facts material to a transaction.

If you believe your investment advisor or broker breached a fiduciary duty to you and caused you financial losses, call Marquardt Law Office LLC for a free evaluation.