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Breach of Fiduciary Duty

Many retail investors today are unclear about the roles played by brokerage firms and registered investment advisors and the impact of the different standards that apply to each. This lack of understanding can result in investors relying on what their brokers tell them believing that they are held to a higher fiduciary standard to their detriment. Because investors may not have the time, information or market sophistication to fully understand today’s complex financial products understanding the different standards applicable to the professional they are working with is essential.

Registered Investment Advisors vs. Stockbrokers

Registered Investment Advisors are fiduciaries as required by §275.204A-1 the Investment Advisers Act of 1940. As fiduciaries, registered investment advisors are held to a higher standard when it comes to making recommendations to clients. They have a fundamental obligation to act in the best interest of their clients and owe clients a duty of loyalty and good faith at the time of making investment recommendations.

Stockbrokers on the other hand are only subject to a suitability standard as required by FINRA Rule 2111 . The suitability standard requires brokers to have a “reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer.” suitability is a much lower standard to be held to when selling an investment.

For many years stockbrokers have held themselves out as “financial advisors” to their clients. When a financial advisor lauds their financial expertise to garner a client’s business and clients rely upon these representations, a fiduciary relationship may be formed whether in a typical “non-discretionary” brokerage account or a fee-based investment advisory account.

SEC Makes Attempts to Adopt a Uniform Fiduciary Standard

A Securities and Exchange Commission (SEC) staff study on a Uniform Fiduciary Standard of Conduct for Broker-Dealers and Investment Advisers recommended:

“…that the Commission . . . adopt and implement, with appropriate guidance, the uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers." The standard, according to the study, should be "no less stringent than currently applied to investment advisers under [the] Advisers Act."

While this recommendation is still an aspiration for the future conduct of stockbrokers, the FINRA arbitration process must consider facts to determine whether there is a breach of a fiduciary duty when investors have suffered losses. Investment losses that are the result of a breach of fiduciary duty can be a cause of action in a FINRA arbitration claim for damages.

In fact “breach of fiduciary duty” is one of the top types of controversies in customer arbitration claims filed with FINRA.

In many instances the failure to disclose all relevant information concerning an investment recommendation may be the result of a conflict of interest between the financial advisor and his client. Financial advisors are required to avoid any conflicts of interest when providing investment advice. If a financial advisor provides commissioned based advice and the investor relies upon the representation that the advisor has his “best interest” in mind, the investor is considered reasonable in his reliance.

Contact Our Firm if You’ve Suffered Losses

The Silver Law Group can help you determine whether an investment loss is the result of a breach of fiduciary duty. If an investor suffers losses as a result of a conflict of interest or other misconduct they may be able recover their losses in a FINRA arbitration claim.

Client Reviews
“My in-laws lost their retirement funds to a dishonest broker. Silver Law Group and Scott Silver aggressively pursued their losses until he got their money back.” Ben M.
“I foolishly gave my money to a con artist promising me a great return on my money. Scott Silver zealously handled the matter, recovering my losses.” Darren S.
“I almost lost a lifetime of earnings after trusting the wrong person. Silver Law Group guided me through the arbitration process and a mediation, always fully prepared and committed to my case.” Scott T.