New investors often hire financial advisors to manage their investment portfolios. Those financial advisors have “fiduciary duties” to their clients. A fiduciary’s primary duties include:
- Putting the client’s interests first, ahead of their own interests;
- Avoiding conflicts of interests or disclosing conflicts to the client up front; and
- Acting with honesty, good faith, and loyalty toward the client.
Fiduciary duties impose a legal responsibility on the financial advisor, and they can be liable when they breach those duties to their clients. A financial advisor who upholds their fiduciary duties can give investors valuable insight into successful investment strategies and how to maximize returns. But not all financial advisors fulfill their fiduciary duties and put their clients’ interests ahead of their own.
Before hiring investment professionals, you should know what obligations and duties they owe you. This will help you recognize advisor misconduct or negligence more easily when and if it occurs.
If you or a loved one suffered losses after your financial advisor breached a fiduciary duty, contact our securities fraud attorneys at Patil Law today by phone at 800-950-6553, via our secure online portal, or by email.
What Is a Fiduciary Relationship?
Fiduciary duties arise only in special circumstances where a party reposes trust in someone based on their expertise. Examples include when an attorney acts for a client or a trustee administers an estate for beneficiaries. The scope of a fiduciary’s duties often depend on the kind of relationship. An investment adviser fiduciary relationship is created when you sign an agreement to work with an individual investment advisor or an investment advisory firm.
But not all investment professionals are fiduciaries. Stock brokers who simply execute trades are not fiduciaries. But Registered Investment Advisers (RIAs) are fiduciaries. RIAs register with the SEC and are the only investment professionals who can call themselves “financial advisors.” (Read more about the difference between investment advisers and stockbrokers here.)
Is My Investment Advisor a Fiduciary?
According to the Investment Advisers Act of 1940, only registered investment advisors are considered fiduciaries. Though stock brokers sometimes use the term, only Registered Investment Advisors are allowed to call themselves financial advisors. The SEC maintains a list of RIAs where you can check if your financial advisor is a Registered Investment Advisor. You can also use the list to see whether the firm your financial advisor is a federally registered investment advisor firm.
What Are the Duties of Stockbrokers?
Broker-dealers and stockbrokers are not Registered Investment Advisors and are not fiduciaries. That does not mean they have no obligations to their clients, however.
Previously, broker-dealers only had to comply with the lower “suitability standard.” However, in 2020, the SEC enacted Regulation BI, also known as the Best Interest Rule. This rule requires broker-dealers to act in the best interests of their clients when making investment recommendations and imposes four main duties on broker-dealers:
- Disclose all the material facts about the services the broker will provide, the fees it will charge, and capacity in which the broker is acting.
- Exercise reasonable diligence, care, and skill when making investment recommendations, and only recommend investments that are in the client’s best interest.
- Establish and enforce written policies on, at a minimum, conflicts of interest.
- Establish and enforce written policies and procedures to comply with Regulation BI.
If you or a loved one suffered losses after your stock broker breached an obligation under Regulation BI, contact our securities fraud attorneys at Patil Law today by phone at 800-950-6553, via our secure online portal, or by email.
What Constitutes a Breach of Fiduciary Duty?
A breach of fiduciary duty occurs whenever a fiduciary puts their own or someone else’s interest above the interests of their client. This can happen in a wide variety of ways. A few of the most common are detailed below.
Failure to Conduct Due Diligence
Before recommending an investment, a financial advisor has to become informed about its potential risks and rewards, or conduct “due diligence.” This includes investigating:
- The investment’s cost;
- The objectives of the product or strategy;
- Any special characteristics of the investment;
- Liquidity concerns;
- Potential benefits and risks; and
- Likely performance in different market conditions.
Recommending a particular investment or investment strategy is a breach of fiduciary duty.
Recommending Unsuitable Investments
No two investors are the same, so financial advisors have a duty to consider the individual investment profile of each client before making recommendations. In other words, brokers can only recommend investments that are suitable for a specific client’s investment profile.
An investment profile includes information such as the client’s age; employment status; investment time horizon; risk tolerance; liquidity needs; and investment goals.
Utilizing the same investment plan for every client, without taking into account a client’s specific situation, can result in an advisor recommending unsuitable investments. If you or a loved one suffered losses after your financial advisor recommended unsuitable investments, contact our securities fraud attorneys at Patil Law today by phone at 800-950-6553, via our secure online portal, or by email.
Engaging in or Failing to Disclose a Conflict of Interest
Sometimes, a financial advisor can discover conflicts of interest between themselves and a client, such as when the advisor would benefit personally from a particular investment or trade. When this occurs, your financial advisor should disclose the full extent of the conflict right away, so the client can make an informed decision about whether to waive the conflict or seek other advice.
Excessive Trading
Excessive trading or “churning” happens when an investment advisor buys and sells securities excessively in order to make more money on commissions. You can protect yourself from churning by taking few simply steps, including:
- Reviewing your account statements regularly;
- Keeping track of the fees you’re incurring on trades; and
- Asking for an explanation if you notice lots of activity in your account.
The losses you sustain if a financial advisor churns your account can be recovered through arbitration. Contact our securities fraud attorneys at Patil Law today by phone at 800-950-6553, via secure online portal, or by email.
Unauthorized Trading
Unauthorized trading occurs when a broker or advisor makes trades in a client’s account without their permission. Some investors have “discretionary” accounts, where a trader has permission to make certain kinds of trades. But if an investor has a “non-discretionary account,” the financial advisor has to get your verbal or written authorization prior to making any trades in the client’s account.
If you discover an advisor is making unauthorized trades in a non-discretionary account, it’s important to report the misconduct to their broker-dealer immediately, or the advisor may be entitled to claim that you have “ratified” the unauthorized trade by not voicing your objection right away.
Misrepresentation or Omission of Material Facts
To make an informed decision about their investments, clients need to know all the material information about an investment. Material information is information a reasonable investor would consider necessary to know when making a decision about whether to invest.
Sometimes, financial advisors will misrepresent the possible risks of an investment, or fail to disclose that an investment will not be liquid for a long amount of time. Failing to disclose this kind of information, or misrepresenting material issues, is a breach of an advisor’s fiduciary duties.
Lack of Diversification
Investors know not to put all their eggs in one basket. If your portfolio is heavily concentrated in one particular market or sector, you stand to lose everything if that market crashes. So you financial advisor should recommend a mixture of investments allocated among various asset classes and industries. If your financial advisor failed to adequately diversify your portfolio, you could have grounds to recover your investment losses in FINRA arbitration.
Think Your Financial Advisor Breached a Fiduciary Duty? Contact Patil Law Today
If you suffered investment losses because your financial advisor breached a fiduciary duty, you may be able to recover your losses in FINRA arbitration. Our attorneys have years of experience in identifying and recovering losses from advisors’ breaches of fiduciary duties.
Contact our nationwide investment fraud lawyers today so can you recover the compensation you deserve. Our case evaluation is completely free. Call (800) 950-6553 or email us today.
