All stockbrokers (also frequently referred to as a ‘financial advisors’, ‘investment advisors’, or simply as ‘brokers’) have fiduciary obligations to their clients.
A fiduciary duty is best thought of as a set of legal responsibilities placed on a person (or entity) that is in an especially powerful position.
Unfortunately, all too often, stockbrokers violate their fiduciary duties to their customers.
Here, our experienced investment fraud attorneys discuss broker fiduciary duty along with some examples of the most common violations and how they look in practice.
Fiduciary Duty: The Highest Standard of Care
A fiduciary duty is the highest possible standard of care that is imposed under American law. For stockbrokers, their fiduciary responsibilities stem from the Investment Advisers Act of 1940. This legislation places a very high level responsibility on brokers.
The reason that the legal duty is heightened is because customers are inherently forced to place a tremendous amount of trust in stockbrokers. This trust is required for many reasons, not the least of which is that brokers have access to very sensitive client information. Indeed, in many cases, stockbrokers have direct access to a customer’s financial accounts.
Beyond being placed in a privileged position, stockbrokers also operate in a highly technical, notoriously complex industry. Investing is more complicated than it has ever been. The industry is so complicated that investors have almost no choice but to put some level of faith in the guidance of their broker.
Stockbroker Broker Breach of Fiduciary Duty: Four Common Examples
1. Failure to Act in the Customer’s Best Interests
The number one rule that stockbrokers must follow is that their clients’ best interests must always come first. This is an all-encompassing standard, meaning that the clients’ interests come first in any situation. However, this is most important when it comes to areas where a broker’s personal financial interests might be in conflict with the best interests of the client.
The most obvious example of ‘dueling’ interests is when it comes to investment fees. There is no doubt that stockbrokers have a right to charge a fair price for their services. Yet, at the same time, they must ensure that they are protecting their clients’ best interests. If a broker charges excessive or unfairly hidden fees, the broker has breached their duty to act in good faith and requirement for fair dealing.
2. Failure to Disclose Material Information
Another common broker breach of fiduciary duty relates to disclosure of material information. Stockbrokers must always disclose all material information to their clients. Indeed, brokers cannot hide documents or information for any reasons. In some cases, brokers will try to ‘undersell’ the risks associated with an investment to complete a sale; in other cases, bad acting brokers try to cover up the fact that their client suffered investment losses. Regardless, concealing material information is a breach of fiduciary duties.
3.Operating with a Conflicting Interests
Brokers have ‘duty of loyalty’ to their clients. This obligation of loyalty is one key aspect of their overall fiduciary duties. What this means in practice is that brokers must go out of their way to avoid any actual or potential conflicts of interests. The simple fact is that when a conflict of interests exists, a customer can not reasonably rely on their advisor to act in good faith. For example, if a stockbroker is being paid to recommended an investment, then their customers would not be able to truly rely on that advice; here, the conflicting interests make the financial recommendation suspect.
Finally, stockbrokers have a fiduciary duty to provide their clients with competent advice. The failure to provide quality advice is a form of negligence. Broker negligence can come in many different forms. For example, your broker may be negligent if they push you into unsuitable investments, or if they fail to properly diversify your portfolio.
To be clear, broker negligence and broker breach of fiduciary duty do not require intentional misconduct. Nor do they require a broker trying to gain some type of personal benefit. To prove a breach of fiduciary duty based on the theory of negligence, a client must simply establish that they received advice that falls below the quality that is required by industry standards.
Related Video: What Legal Duties Do Financial Advisors Owe Their Customers?
Did Your Broker Breach a Fiduciary Duty?
We can help. At the Sonn Law Group, our stockbroker fraud attorneys have helped many victims recover fair compensation for their losses. To learn more about what we can do for you, please contact our team today. Initial legal consultations are free of charge, and we take all investment fraud claims on a contingency fee basis.