Breach Of Fiduciary Duty

What Is a Fiduciary Duty?

A fiduciary is someone tasked with acting in the best interest of another, this person is called the principal. Upon entering a relationship, the fiduciary is legally bound to act under a set of ethical and even legal obligations. These are known as fiduciary duties. 

Generally speaking, all those in the role of fiduciary have a duty of both loyalty and care to their principal. These duties require the fiduciary to act in the best interest of the principal, in ways such as avoiding conflicts of interest and self-dealing.

Fiduciary Duties of Financial Advisors

All financial advisors have a duty of care, but only those registered as financial advisors with the Securities and Exchange Commission, the SEC, have a fiduciary duty. This is why it is vital to know if your financial advisor is registered, or represented themselves as a registered advisor at any point. 

Duty To Inform Investor

The duty to inform the investor means that a financial advisor must ensure the principal is fully informed of the risks that could be associated with their securities purchase or sale. It is vital that the advisor does not misrepresent any of the facts about the transaction. 

Duty To Act Promptly & With Authorization

This duty binds the advisor to promptly perform any order submitted with the investor’s consent. Unless the investor has set up a discretionary account, their financial advisor must obtain authorization for each investment separately.

Duty To Recommend Suitable Investments

Before any investment can be recommended, the financial advisor must perform a significant amount of due diligence. This includes studying and investigating the objectives of the investor, as well as their overall financial situation, tax status, and more. The investments that a financial advisor recommends to their clients must align with those needs and objectives.

Duty To Refrain from Self-Dealing

Registered financial advisors are prohibited from initiating any transaction where they will personally benefit. 

Duty To Avoid Conflicts of Interest

All investment recommendations made from July 1, 2020, forward must be free of any conflicts of interest. In the case where the conflict is unavoidable, the financial advisor has a legal obligation to openly disclose that conflict to the investor.

Common Forms of Breach of Fiduciary Duty

This list is just a brief illustration of how a financial advisor can breach their duty. The key in all instances is that the fiduciary fails to act in the best interest of the principal.

Misrepresentation Or Failure to Disclose

A very common breach of fiduciary duty is failing to disclose all the material information about an investment, or worse, deliberately misrepresenting it. The material information is what any reasonable investor would consider an important factor in their decision to invest. This “reasonable investor” standard is an important standard and one that your attorney will need to leverage effectively.

Excessive Trading

Excessive trading is also known as “churning”, and when your financial advisor uses your assets and accounts for excessive trading, it constitutes a breach of fiduciary duty. 

Unsuitable Investments

One of the requirements made by financial advisors is that they know and understand their customer’s financial status and investment goals before making any recommendations. This means understanding what the customer wants in terms of risk level, time horizon, tax status, and more. A breach of fiduciary duty occurs if an unsuitable investment is made, even if the order is made with good intentions.

Diversification Failure

Advisors must maintain effective mixes of investment types and assets so that the portfolio is protected as much as possible from changes in market conditions. When assets are properly allocated among various asset classes, the portfolio, as a whole, is much more resilient. Failing to do this represents a breach of fiduciary duty and can put your investments at risk of significant losses. Over-concentration of assets into a particular asset class can be the result of misconduct or negligence and can wipe out the assets with a modest market correction.

Failure To Follow Instructions

If you give your advisor instructions, they then have a fiduciary duty to carry them out promptly. If they fail to do so and it results in financial losses, you may be able to recover damages with a breach of fiduciary duty claim.

The Four Elements of a Valid Claim For Breach Of Fiduciary Duty

Every valid claim for breach of fiduciary duty must have four elements represented. There must be a demonstrated duty, as well as a breach of that duty. The losses must have been directly caused by the breach, and the damages are limited to those losses.

Duty

There must exist a fiduciary relationship for there to be a valid duty. The fiduciary must knowingly accept this role and relationship, and it is often done through a written contract.

Breach

There must be some proof that the fiduciary created a breach of fiduciary duty. These can be deliberate acts, or they can occur due to a failure to act on the fiduciary’s part.

Causation

There must be a direct link between the breach of fiduciary duty and the resultant damages. These damages can be economic, as well as non-economic.

Damages

There must be actual, provable damages or financial losses. A breach of fiduciary duty alone is not enough, there must have been harm that was caused.

Trust TorkLaw To Be Your Investment Fraud Advocate

If you believe that you are the victim of a breach of fiduciary duty, reach out today and speak with an investment fraud expert at TorkLaw. There is no fee to discuss the details of your case in confidence.