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Breach of Fiduciary Duty
What is a Fiduciary Duty?
Fiduciary Duty is a legal obligation of one party to act in the best financial interest of another – to place another’s interests first – to make the client’s interests paramount. When a person, such as a Financial Advisor or Stockbroker, agrees to act in a fiduciary capacity, they are obligated to act in a manner that puts the client’s interests first. The law forbids the Stockbroker from acting in any manner adverse or contrary to the client’s interests, including acting for his own benefit when it is contrary to the client’s best interests. Clients are entitled to the best efforts of the fiduciary and the fiduciary must exercise all the skill, care and diligence at his/her disposal when acting on the client’s behalf.
When Does A Stockbroker Owe a Fiduciary Duty?
In Florida, one can argue that a Financial Advisor or Stockbroker always owes their client a fiduciary duty. Financial Advisors would argue otherwise. Since investors are encouraged to place their trust and confidence in their Financial Advisor for their expertise and discretion in making investment decisions, Financial Advisors are expected to honor this trust by maintaining a high standard of honesty, including full disclosure of all material information, and may not benefit at the client’s expense.
On June 5, 2019, the SEC published “Regulation Best Interest”, which applies to Stockbrokers and Financial Advisors. Regulation Best Interest imposes a new standard of conduct specifically for broker-dealers that substantially enhances the broker-dealer standard of conduct beyond existing suitability obligations. The standard of conduct draws from key fiduciary principles and cannot be satisfied through disclosure alone. It provides specific requirements to address certain aspects of the relationships between broker-dealers and their retail customers, including certain conflicts related to compensation.
When making a recommendation of a securities transaction or an investment strategy involving securities, a broker-dealer must act in the retail customer’s best interest and cannot place its own interests ahead of the customer’s interests. Regulation Best Interest, in an enhancement from the proposal, applies to account recommendations, including recommendations to roll over or transfer assets in a workplace retirement plan account to an IRA, and recommendations to take a plan distribution. It also applies to implicit “recommendations to hold” that result from agreed-upon account monitoring.
Other factors determining fiduciary standards include whether federal or state law applies. Each state’s laws are different, and interpretations of federal law vary throughout the country. Determining the existence of a fiduciary duty may include a consideration of the parties’ reasonable expectations regarding the relationship but not all relationships are considered equal. In any relationship, each party has expectations, and whether those expectations are reasonable, or realistic, depends upon the parties’ communications, both express and implicit.
What Should You Expect?
One of the most frequently litigated issues is whether a Stockbroker/Financial Advisor has a continuing obligation to monitor investments that the advisor recommends. In other words, is the advisor obligated to stay current and tell you when negative news may impact your investment? This is a reasonable expectation by the investor. Marketing literature generally suggests that such an obligation not only exists, but advisors want investors to believe that monitoring investments is a very basic service.
Unfortunately, the Stockbroker’s lawyer will later argue that there was no duty to keep the investor informed unless it is spelled out in a contract. Incredibly, there actually exists support in the law for this position. It therefore makes sense, at the beginning of the investor / advisor relationship, to clearly articulate the extent of the Stockbroker’s duties.
What Does This All Mean?
The factors that determine fiduciary duty can be confusing. The Law Office of David A. Weintraub can help you understand your Stockbroker’s duties, and whether a fiduciary duty has been breached.
