When you hire an investment representative, you want to be sure that you have selected someone who is truly qualified for the job on your side. Certainly, you should check the credentials of a financial advisor to be sure that they are safe, skilled, and reliable. From there, you need a representative who is well-prepared to listen to and serve your individual investment needs.
You have probably heard terms like broker, stockbroker, financial advisor, and investment advisor thrown around. Often, it seems like these terms are used almost interchangeably. Does the title of the investment representative that you hire actually matter?
The answer is a resounding yes. While certain investment representatives are ‘fiduciaries’, others are merely ‘brokers’. From a legal perspective, this is a critically important distinction. Here, our experienced securities fraud attorneys explain what you need to know about the difference between a fiduciary and a broker.
A Fiduciary Must Act in Your Best Interests
Registered investment advisors (RIAs) are fiduciaries. Under federal securities law (Investment Advisers Act of 1940), these investment representatives are legally required to act in the best interests of their customers. Under federal law and securities regulations, fiduciaries must:
- Act with high level of professional skill;
- Put the best financial interests of their clients above their own best interests;
- Make complete disclosures of all information relevant to any transactions; and
- Avoid conflicts of interests.
The fiduciary duty is the highest standard of care under American law. If your investment representative is a fiduciary, then you can hold them liable for losses sustained due to a failure to act in your best interests.
A Broker Must Give Suitable Investment Advice
A broker is not a fiduciary. If you are working with a ‘stockbroker’, that individual almost certainly does not owe you any fiduciaries duties. As such, they are not required to act in your best financial interests. Instead, brokers are subject to the suitability standard. Under this legal standard, brokers must only recommend and offer investment opportunities to customers that they reasonably believe are appropriate for the investor’s specific circumstances.
To be clear, this means that brokers do not have to believe that the investment opportunity is actually the best one that is available to the customer. Does this mean that brokers are essentially salespeople? In many ways, yes it does. Brokers are often paid on commision. They are financially incentivized to sell certain products to investors. While they must ensure that those financial products are suitable for the investor, the financial product may not actually be in the investor’s best interests.
Contact Our Investment Fraud Attorneys Today
At Sonn Law Group, our securities fraud lawyers fight hard to hold bad acting brokers and fiduciaries legally accountable. If you are an investor who has lost a considerable amount of money, you may be entitled to compensation. To get a free review of your broker negligence claim, please contact our law firm today. We only get paid if we win your case.