Breach of Fiduciary Duty: A Guide for Investors

Did Your Investment Advisor Breach their Fiduciary Duty? You May Be Entitled to Financial Compensation for Your Losses

Investment professionals owe certain legal duties to their clients. Most notably, registered investment advisors (RIAs) are held to the fiduciary duty standard. This is the most stringent standard of care that exists under American law. Under the fiduciary duty rule, RIAs have a legal obligation to put their client’s financial interests above their own personal financial interests.

However, not all investment professionals are fiduciaries under the law. Many financial advisors act as brokers. In these cases, a financial professional is subject to the suitability rule, not the fiduciary duty rule. This is a much lower standard of care. In effect, it means that brokers are only required to make recommendations and securities sales that are ‘suitable’ for their customers. A broker does not necessarily have to give guidance that is in an investor’s best financial interests.

Breach of fiduciary duty claims are deeply complex. At Sonn Law Group, our dedicated securities fraud lawyers have extensive experience holding bad investment advisors legally liable for their breach of fiduciary duty or for any other professional misconduct. If you lost money because your investment advisor committed acts of fraud or negligence, we can help. Contact our breach of fiduciary duty attorneys today for a free review of your claim.

What is a Fiduciary Duty?

In the most basic terms, a fiduciary duty is a legal responsibility to act in the best interests of another party. In practice, determining what type of conduct violates a fiduciary duty can be highly challenging. There are certainly some cases in which a breach of fiduciary duty is clear and obvious. However, there are also many other cases that are much more complicated. It is important to clearly define what a fiduciary duty entails in an investment context. Investment advisors who are subject to the fiduciary duty standard must always do the following:

• Act with a high level of professional skill;
• Perform proper due diligence;
• Make full and accurate disclosures to the investor;
• Avoid all undisclosed conflicts of interest; and
• Always put the investor’s financial interests first, even above their own personal interests.

Who is a Fiduciary and Where Does the Fiduciary Duty Come From?

In United States law, fiduciaries duties arise out of many different types of professional relationships. For example, business partners owe fiduciary obligations to each other and to their company. Corporate officers owe fiduciary duties to their firm and to all of the shareholders. Trustees have fiduciary obligations to the beneficiary that they are representing. Finally, investment advisors owe fiduciary duties to their customers.

As a general rule, a fiduciary duty arises out of a relationship that requires a heightened degree of trust, confidence, and reliance. That being said, fiduciary duties do not arise automatically. There must be a basis in an applicable state or federal law. Registered investment advisors (RIAs) are held to a fiduciary duty under the Investment Advisers Act of 1940. However, other investment professionals are not held to the same standard of care.

How Does Fiduciary Duty Apply to Stockbrokers and Financial Advisors?

Many investors are shocked to learn that their stockbroker/financial advisor is not legally required to act in their best interests. Yet, it is true. Under current U.S. law, stockbrokers and certain financial advisors are not subject to the fiduciary duty rule. Instead, these financial professionals must only follow the less strict suitability requirement.

In recent years, there has been a major push for reform that will better protect investors. In fact, in 2010, there was an official White House report that noted that the lack of a fiduciary duty requirement (that would protect investors from broker conflicts of interests) cost Americans more than $17 billion in retirement savings each year. Soon after, the Obama Administration began pushing for a major rules upgraded. A strengthened fiduciary rule was scheduled to be enacted in 2017.

Sadly, that reform has not materialized. There was a serious push-back from powerful players in the industry. When political change swept into Washington, the proposed fiduciary duty rule was pushed out. Shortly after taking office in January of 2018, President Donald Trump made the unfortunate decision to kill the rule.

While a strengthened fiduciary duty rule is badly needed, the fact remains that as of 2018, brokers are not held to a fiduciary standard. For this reason, it is incredibly important that you have a clear understanding of your relationship with your investment professional.

Please be sure to ask your investment representative if they are acting as an investment advisor to you, thus owing you a fiduciary duty, or if they are acting as a broker, thus only owing you a duty to recommend and sell suitable financial products. You need to know their obligations to you.

What are the Elements of a Breach of Fiduciary Duty?

To prevail in a breach of fiduciary duty claim, you must be able to present a compelling case that satisfies all legal requirements. Although fiduciaries are held to high legal standards, that does not mean that winning a breach of fiduciary duty claim is easy. Quite the contrary; these cases are notoriously complex, particularly in the context of registered investment advisors.

If you lost money due to an investment professional’s breach of fiduciary duty, it is crucial that you consult with a qualified investment fraud lawyer immediately. Your lawyer will be able to start securing and assembling all of the relevant evidence in your breach of fiduciary duty case so that you can hold the bad-acting financial professional legally accountable for their improper conduct. You must prove all of the required elements of a breach of fiduciary duty claim, those being:

1. The existence of fiduciary duty: You must be able to prove your advisor actually owed you fiduciary obligations. While this element may sound simple and straightforward, there are many cases in which it is more complicated. Many financial professionals are dual-registered. In practice, this means that they act as both investment advisors (fiduciaries) and as brokers (not fiduciaries). They owe different duties to different customers. This can be confusing and frustrating for investors. This is why clarity is needed when a relationship is formed.
2. A breach of fiduciary duty: Next, you must be able to prove that your investment advisor actually breached their fiduciary duty. A breach of fiduciary duty can come in many different forms. In essence, you will need to present evidence that shows that, for some reason, your advisor failed to look out for your best financial interests.
3. A connection between the breach and your losses: You cannot hold an investment advisor legally liable for your losses unless you can prove that your losses were caused, in part, by the breach of fiduciary duty. Proving this causal link is critically important. In some cases, the connection is obvious; in other cases, proving this connection may be more challenging.
4. You sustained real investment losses: Finally, you must prove your damages. This element of a breach of fiduciary duty claim should not be overlooked. In investment fraud and broker negligence cases, financial relief is generally compensatory in nature. You will only be able to recover money to the extent that you can prove the value of your financial losses. Careful, well-prepared documentation is a must. Without it, full recovery will likely be out of reach.

Examples of Common Forms of Breaches of Fiduciary Duty

One of the things that makes breach of fiduciary duty claims so complex is that they come in many forms. An investment advisor can breach their duties to their clients (the investor) in a wide array of different ways. At Sonn Law Group, our skilled investment fraud attorneys have deep experience handling breach of fiduciary duty claims. Here, we offer a list of common examples of investment advisor breach of fiduciary duty:

• Lack of proper due diligence: Investment advisors must always handle a customer’s investment account with an adequate level of professional skill. The failure to conduct proper due diligence on an investment opportunity is a breach of fiduciary duty.
• Failure to disclose material facts: Fiduciaries must keep their clients fully informed. If fiduciaries fail to disclose material information, they may be held liable for any resulting financial losses.
• The commingling of investment funds: Investment advisors should not share accounts with their customers. The commingling of funds is strictly prohibited. Client money must be kept safe.
• Undisclosed conflicts of interest: Fiduciaries must avoid all conflicts of interests. Unlike a broker, a fiduciary cannot get paid a commission by a mutual fund when selling that mutual fund to customers. Conflicts of interest must be avoided.
• Usurping of investment opportunity: Fiduciaries are required to put investor interests first. A fiduciary cannot take an opportunity for themselves that is suited for a client.
• Unauthorized transactions: Investment advisors must always get the proper legal authority to conduct and trades, transactions, or transfers on a client’s account. Making unauthorized trades is a violation of fiduciary duties.
• Misappropriation of investor funds: Finally, fiduciaries are strictly prohibited from using client money for anything other than its intended purpose. The misappropriation of investor funds is a clear breach of a fiduciary duty.

Can I Bring a Lawsuit if My Advisor Breached Their Fiduciary Duty (Causes of Action)?

If you lost money as a result of your financial advisor’s breach of fiduciary duty, you can take legal action to get financial compensation. In some cases, you can file a lawsuit against your investment advisor. However, there are also many cases in which investors are required to seek compensation for their losses through the FINRA arbitration process. The reason for this is relatively simple: most investors sign a customer agreement with their investment advisor that mandates arbitration to resolve any disputes.

State and federal courts have repeatedly ruled that the mandatory arbitration provisions included in standard investment contracts are legally binding. Thus, investors who have a complaint against their broker are often required to seek financial relief through arbitration.

The good news is that you can hold your investment advisor legally liable for breach of fiduciary duty through FINRA arbitration. In fact, the official Financial Industry Regulatory Authority statistics indicate that breach of fiduciary duty is the single most common cause of action raised in investor complaints.

What Damages May Be Available for Breach of Fiduciary Duty?

If you have been a victim of an investment advisor’s breach of fiduciary duty, you have a right to seek financial compensation for the full extent of your investment losses. While this is a relatively simple concept in theory, calculating damages in breach of fiduciary duty case can actually prove to be extremely complex.

To get the full and fair compensation that you are owed, you should be represented by a qualified investment fraud lawyer. Your lawyer will be able to thoroughly examine all of the financial records in your case in order to identify and establish every point in which you sustained financial losses as a result of your investment advisor’s misconduct.

In a limited number of cases, investors may be able to seek punitive damages from their financial advisor. Punitive damages are essentially ‘penalty’ damages. These damages are not tied directly to the investor’s losses, but are instead designed to punish the abhorrent conduct of the bad broker. Punitive damages must be requested by the victimized investor. Depending on the circumstances of your breach of fiduciary duty case, such a request may be advisable.

Contact Our Investment Fraud Attorneys Today

At Sonn Law Group, our securities fraud lawyers are committed to fighting for the rights and interests of investors nationwide. If you have lost money due to a breach of fiduciary duty, we can help. Contact our law firm today for a free, no obligation initial legal consultation. Our investment fraud lawyers handle breach of fiduciary duty claims on a contingency fee basis — we only collect legal fees if we win or successfully settle your case. If you do not get paid, then we do not get paid.