What is a Breach of Fiduciary Duty?

In Florida, a fiduciary duty is imposed on brokers and investment advisers when they place themselves in a position of trust and confidence with an investor. A fiduciary duty is described as a duty to act with the utmost good faith, fairness, and honesty. Investors who have suffered investment losses may have a cause of action against a broker or investment adviser because they breached a fiduciary duty that was owed to them. A breach of fiduciary duty can be negligent or intentional. 

Claims for unsuitable investment advice in combination with breach of fiduciary duty are often brought in FINRA arbitration to recover an investor’s investment losses. 

Fiduciary Duties Owed to Investors

Under the securities laws, stockbrokers and investment advisers have an obligation to act in the best interests of the investor and not put their own interest ahead of the investor. In June 2019, the Securities and Exchange Commission (SEC) adopted a new rule, the Regulation Best Interest, establishing a broker’s standard of conduct that draws from principles that apply to investment advice under the Investment Advisers Act of 1940 (Advisers Act), including state common law fiduciary principles. Regulation Best Interest is separate from any common law analysis of whether a broker has fiduciary duties.

Generally, courts interpreting state common law have imposed fiduciary obligations on brokers in certain circumstances. A broker owes an investor a fiduciary duty in situations, such as: 

• Where a broker exercises discretion or control over an investor’s assets.
  
  
• When a broker establishes a relationship of trust and confidence with their customers. 

Broker’s Best Interest Duties to Protect Investors

Regulation Best Interest imposes a broker’s standard of conduct beyond existing suitability obligations by requiring a broker to act in the best interest of an investor at the time a recommendation is made. A broker’s duty is recommendation-based to reflect that a broker-investor relationship is generally transaction-based and sporadic. In this regard, the duty does not extend beyond a broker’s particular recommendation and does not impose a duty to provide ongoing advice and monitoring of an investor’s account. 

Regulation Best Interest requires a broker to act in the best interest of the investor and not put their own interest ahead of the investor when making recommendations of securities or investment strategies. Before or at the time of the recommendation, a broker needs to:

• Provide a written disclosure of material facts relating to the scope and terms of the relationship including that they are acting in a broker capacity, material fees and charges the investor will incur, and type and scope of services to be provided.
  
  
• Disclose whether or not the broker will monitor transactions and strategies including the frequency and duration of those services. 
  
  
• Disclose summary of how a broker is compensated for their recommendations as well as the conflicts of interest that the compensation arrangement creates. A broker must mitigate or eliminate conflicts creating a financial incentive for a broker to put their interests ahead of the investor’s interest.
  
  
• Understand and consider the potential costs associated with its recommendation in light of other factors and the retail customer’s investment profile.
  
  
• Understand the security or investment strategy recommended before determining whether the recommendation is in the best interest of a particular investor. A broker should consider the costs and expected return as well as any financial incentives of the investment or investment strategy.
  
  
• Determine whether the recommendation is in the investor’s best interest based on their investment profile (as defined in the FINRA Suitability Rule) and the potential risks, rewards, and costs associated with the recommendation. In evaluating a recommendation, the broker should consider available investment alternatives.

Investment Advisers’ Fiduciary Duties Owed to Investors

In June 2019, the SEC issued its Fiduciary Interpretation to clarify aspects of the fiduciary duty an investment adviser owes an investor under the Advisers Act. The duties of an investment adviser under the Advisers Act differ in certain respects from those of a broker under Regulation Best Interest. An investment adviser’s relationship with an investor involves the duty to provide ongoing advice and monitoring at a frequency that is in the best interest of the investor. The adviser-investor relationship is generally ongoing and the requirements of the investment adviser’s fiduciary duty usually applies to the entire relationship.

An adviser has a fiduciary duty to provide investment advice that is in the best interest of the investor and suitable for the investor. To provide such advice, an adviser needs to: 

• Develop an understanding of the investor’s objectives that includes, their financial situation, financial sophistication, investment experience, and financial goals.
  
  
• Evaluate whether an investor can and is willing to tolerate the risks of any recommended investment based on their objectives, and that the potential benefits justify the risks.
  
  
• Have a thorough understanding of the investment being recommended including the cost associated with the investment advice.
  
  
• Obtain best execution of an investor’s transactions at the most favorable terms reasonably available under the circumstances. 
  
  
• Provide advice and monitoring over the course of the adviser-investor relationship consistent with the agreed advisory arrangement.
  
  
• Disclose all material facts relating to the advisory relationship to avoid making any misrepresentations and omissions. 
  
  
• Disclose any actual or potential conflicts of interest with an investor accurately and completely so that the investor can understand and be able to make an informed decision as to whether to provide consent.
  
  

Breach of Fiduciary Duty by Brokers and Investment Advisers 

Brokers and investment advisers who have a relationship of trust and confidence with an investor owe a fiduciary duty to the investor. A broker or adviser breaches the fiduciary duty when they exploit that fiduciary relationship by engaging in securities fraud. Financial professionals breach the fiduciary duty when they provide conflicted investment recommendations or advice, or take actions that benefit themselves at the expense of the investor. Examples of breach of fiduciary duty by brokers and investment advisers include:

• Churning or excessive trading
  
  
• Misrepresentations and omissions 
  
  
• Unauthorized trading 
  
  

Brokers and investment advisers may also breach the fiduciary duty if they act negligently.

Contact Our Firm If You’re the Victim of Breach of Fiduciary Duty

Reach out to Riera Law if you suffered investment losses caused by a breach of fiduciary duty such as a conflict of interest or misconduct. For your free evaluation, call 305-204-9779 today or contact us online.